NIGERIA DEVELOPMENT UPDATE  |  OCTOBER 2024 Staying the course: Progress amid pressing challenges Nigeria Development Update October 2024 Staying the course: Progress amid pressing challenges NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover credits: "The View" by Jimmy Nwanne. ii STAYING THE COURSE: Progress amid pressing challenges Acknowledgements The Nigeria Development Update (NDU) is a World Bank report series produced twice a year that assesses recent economic and social developments and prospects in Nigeria, and places these in a longer-term and global context. The NDU also provides an in-depth examination of selected policy issues and medium-term development challenges in Nigeria. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Nigeria’s evolving economy. The report was prepared by a World Bank team led by Matheus Bueno (Economist), Gloria Joseph-Raji (Senior Economist), and Jonathan Lain (Senior Economist). The team included: Toluwase Adesina, Lire Ersado, Ayodele Fashogbon, Julien Giorgi, Elena Glinskaya, Arya Iskender, Annika Kaiser, Hadija Kamayo, Priscilla Kandoole, Ruchita Manghnani, Samer Matta, Joseph Ogebe, Lilian Okpeku, Olumide Omoyele, Utz Pape, Dominik Peschel, Elizabeth Purdie, Marko Rissanen, Evis Rucaj, Maheshwor Shrestha, Alex Sienaert, Aleksandar Stojanov, Sering Touray, Julia Vaillant, and Mizuki Yamanaka. The team is grateful for the on-going collaboration with the Central Bank of Nigeria, the Federal Ministry of Finance, the Federal Ministry of Budget and Economic Planning, and the National Bureau of Statistics. The team would like to thank Vinayak Nagaraj and Sara Alnashar for their review comments, and staff of the International Monetary Fund for continual dialogue and collaboration. The team also acknowledges Chinelo Akunyili and Ifeoma Ikenye for their support with the preparation of the Report. External and media relations are managed by Mansir Nasir and Maryam Laushi. Chuka J. Agu worked on the design. The report was prepared under the overall supervision of Ndiame Diop (Country Director for Nigeria), Abebe Adugna (Regional Director for Equitable Growth, Finance, and Institutions), and Sandeep Mahajan (Practice Manager for Macroeconomics, Trade, and Investment). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. For questions about this report please email mbueno@worldbank.org, gjosephraji@worldbank.org, and jlain@ worldbank.org. For information about the World Bank and its activities in Nigeria, please visit: www.worldbank.org/ng iii NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Abbreviations and Acronyms AML/CFT Anti-money laundering/countering of the financing of terrorism BOF Budget Office of the Federation AUM Assets Under Management CAB Current Account Balance CAC Corporate Affairs Commission CAR Capital Adequacy Ratio CBN Central Bank of Nigeria COVID-19 Corona Virus Disease 2019 CRR Cash Reserve Ratio ECOWAS Economic Community of West African States EMDEs Emerging Markets and Developing Economies ER Exchange Rate FAB Financial Account Balance FATF Financial Action Task Force FDI Foreign Direct Investment FPI Foreign Portfolio Investment FX Foreign Exchange GDP Gross Domestic Product LR Liquidity Ratio MPC Monetary Policy Committee MPR Monetary Policy Rate NAFEM Nigerian Autonomous Foreign Exchange Market NAFEX Nigeria Autonomous FX Fixing NBS National Bureau of Statistics NDIC Nigeria Deposit Insurance Commission NPL Non-Performing Loans OMO Open Market Operations OPEC Organization of the Petroleum Exporting Countries PMS Premium Motor Spirit pp Percentage Point(s) PPP Purchasing Power Parity SEC Securities and Exchange Commission US United States VAT Value Added Tax yoy Year-on-year iv STAYING THE COURSE: Progress amid pressing challenges Table of Contents Acknowledgements iii Abbreviations and Acronyms iv Table of Contents v List of Figures vi List of Tables vii List of Boxes vii Overview viii PART 1: Recent economic developments and outlook for Nigeria 1 1.1. Economic growth has been resilient, albeit only moderate 2 1.2. Monetary policy has improved markedly, and inflation has begun to fall 6 1.3. Reforms have successfully achieved a unified, market-reflective exchange rate and the external position is improving 9 1.4. The financial sector remains resilient despite the impacts of recent shocks 14 1.5. A revenue-driven fiscal consolidation is accompanying the monetary policy tightening 15 1.6. Economic Outlook: The global economy is stabilizing and the prospects for Nigeria have improved, albeit still fragile 19 1.7. Policy priorities: Staying the course on macro stabilization reforms, while intensifying support for the poorest households and expanding opportunities 22 PART 2 - Spotlight: Fostering productive jobs is vital to help Nigerians find pathways out of poverty 25 2.1. Sustainable poverty reduction relies on creating productive jobs 26 2.2. Employment alone is not enough to lift Nigerians out of poverty 28 2.3. Very few jobs allow workers to exit poverty 29 2.4 Nigeria’s labor market is changing as work shifts from agriculture to services, but this is not raising productivity and earnings 33 2.5. Accessing productive jobs is even harder for Nigeria’s women and young people 33 2.6. Short- and long-run strategies can help Nigeria’s labor market to drive poverty reduction 38 References 43 Annex 1. Earnings regressions among the wage employed 45 Annex 2. Nigeria - Key Economic Indicators 46 v NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 List of Figures Figure O.1. A snapshot of Nigeria’s economic situation ix Figure 1.1. GDP growth has been resilient to recent shocks and edged up in Q2 2024… 3 Figure 1.2. …mainly driven by services, helped in H1 2024 by stabilizing oil output 3 Figure 1.3. Misguided policies contributed to an inflation surge in Nigeria from 2015 … 7 Figure 1.4. Market rates progressively lost the MPR anchor, as transmission channels weakened 7 Figure 1.5. Monetary policy correction has started to reduce inflation, though the pace of price increases is still high 8 Figure 1.6. …especially for food prices 8 Figure 1.7. FX reforms closed the FX premium and more than doubled turnover 10 Figure 1.8. The real exchange rate has staged a large adjustment 10 Figure 1.9. The exchange rate depreciation has compressed imports… 11 Figure 1.10. …pushing up the current account surplus 11 Figure 1.11. Net FDI and FPI have grown… 12 Figure 1.12. … but FDI to Nigeria remains very low compared to peer countries 12 Figure 1.13. FX Reserves declined in 2023, despite CAB and FAB improvements… 12 Figure 1.14. …but are growing in 2024 12 Figure 1.15. Banking system NPLs slightly breached the 5 percent threshold in Q1 2024 13 Figure 1.16. Banks’ capital buffers have been eroded, but at system level remain above the minimum requirement 13 Figure 1.17. Revenues rose sharply in H1 2024… 18 Figure 1.18. …while expenditure slightly dropped, due to under-execution of capex. 18 Figure 1.19. Central banks have started cutting policy rates 20 Figure 1.20. Commodity price indices are expected to remain broadly at 2023 levels 20 Figure 2.1. Nigeria has experienced rising poverty, reflecting a decade of weak growth and rising inflation 26 Figure 2.2. Nigeria has a young and growing population, providing the country with a sizeable potential demographic dividend 27 Figure 2.3. High employment-to-population ratios, low unemployment, and high poverty often coexist 28 Figure 2.4. Work offers no guarantee of escaping poverty 29 Figure 2.5. Wage jobs are associated with exiting poverty 30 Figure 2.6. Few employed Nigerians hold wage jobs, and even those with higher levels of education have no guarantees of finding wage work 30 Figure 2.7. Wage jobs in the public sector and in large establishments have the highest earnings 31 Figure 2.8. While more education helps Nigerians obtain jobs that use high skills, such jobs are rare even for those with secondary and post-secondary education 32 Figure 2.9. Employment in Nigeria has shifted from agriculture to services in the last two decades, a sector in which productivity is higher overall… 32 Figure 2.10. … but many of Nigeria’s new service-sector jobs are in sub-sectors with lower productivity, including retail and wholesale trade 33 Figure 2.11. Gender differences persist in terms of employment and job quality 34 Figure 2.12. Employed women disproportionately engage in retail and wholesale trade activities 35 vi STAYING THE COURSE: Progress amid pressing challenges Figure 2.13. Family formation and restrictive gender norms worsen gender gaps in labor market engagement, especially in northern Nigeria 36 Figure 2.14.. Women work more hours than men, once caring for children and household chores are considered 37 Figure 2.15.Women are less likely to manage Nigeria’s firms, while male and female managers declare different constraints on hiring women 37 Figure 2.16. Many young Nigerians do not find the jobs that harness their human capital investments 38 Figure 2.17. Nigeria’s labor market outcomes differ widely across the country’s states 41 List of Tables Table O.1. Progress with Key Economic Reforms since December 2022 (I), and the Immediate Top Priorities to Deepen the Reforms (II) xiv Table 1.1. Global and regional indicators, 2021–2024 20 Table 1.2. Progress with Key Economic Reforms Since December 2022 (I), and What Policies Are Still Needed to Sustain and Deepen the Reforms (II) 24 Table 2.1 Summary of policies to help create productive jobs for poverty reduction 42 List of Boxes Box 1.1. The difficult task of correctly evaluating the relative size of Nigeria’s economy 4 Figure B1.1. Lower-income economies are larger when price levels are taken into account 4 Figure B1.2. Comparing Africa’s three largest economies, 2021-23 6 Box 1.2. Quantifying long-term drivers of inflation 8 Figure B1.3. Macroeconomic imbalances were the main contributors to inflation 9 Box 1.3. Quantifying the fiscal cost, through forgone revenues, of multiple exchange rates 16 Figure B1.4. The implicit FX subsidy was higher than the PMS subsidy 17 vii NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Overview flexibility, which eliminated the parallel premium and implicit FX subsidy, along with other fiscal reforms – such as rationalizing tax expenditures, introducing Nigeria’s improved economic policies withholding VAT for key sectors, and improving the have resulted in difficult adjustments and management of revenue remittances by government are starting to show results agencies – sharply increased Federation revenues from 5.5 percent of GDP in H1 2023 to 8.7 percent in H1 Previous distortionary and unsustainable 2024. Monetary policy has also tightened to rein in macroeconomic policies were hindering Nigeria inflation, with a combined 850 basis point monetary from achieving its immense potential. Monetary and policy rate (MPR) hike to 27.25 percent since February foreign exchange (FX) policies were increasingly opaque, 2024, as well as other measures to improve monetary distortive, and inconsistent with maintaining price policy transmission and lift market interest rates. stability, including multiple managed and overvalued Crucially for Nigeria’s economic turnaround, the fiscal official exchange rates. Fiscal revenues were hampered and monetary authorities have also moved decisively to by one of the lowest tax-to-GDP ratios globally (3.2 restore fiscal discipline by ending deficit monetization percent of GDP in 2022), whilst a large share of the and refocusing the central bank on its price and financial Federation’s oil revenues was absorbed by a costly, sector stability mandate. regressive, and opaque gasoline subsidy. The overvalued official exchange rate and emergence of a large parallel The new policy direction is essential, but in the FX market premium, which constituted an implicit FX short-term it has added to already intense pressures subsidy, also imposed large revenue losses, as well as on households and firms. The policy changes, whilst weighing on confidence, investment, and growth. The necessary and urgent to avert an outright fiscal crisis combined fiscal cost of the PMS and FX subsidies was and put Nigeria on a better development path, were enormous. In 2022, the estimated cost was 5.2 percent of undertaken from an already fragile economic position, GDP, equivalent to about three-quarters of the revenues and against the backdrop of political transition, high that flowed to the Federation. The resultant large and inflation, and supply-side shocks (especially of food growing fiscal deficits were increasingly financed by staples), and other heightened uncertainties. The removal deficit monetization through Ways and Means Advances of the PMS subsidy led to an unprecedented tripling from the Central Bank of Nigeria (CBN), the stock of of retail gasoline prices in 2023, which was followed which increased to 11.6 percent of GDP by end-2022. by another approximately 50 percent increase in 2024 The economy inevitably fell into a downward spiral of through early October. The exchange rate unification eroding confidence, surging inflation, de facto currency and subsequent depreciation also had substantial knock- depreciation manifesting through a widening FX on effects on general price levels. Nigerians across the premium, declining official reserves, burgeoning debt, income spectrum have been affected, from those at the weak growth, and increasing poverty and social fragility. bottom facing soaring food prices, to those running generators, to those at the top with cars. Monetary Major reforms have been undertaken to restore policy tightening has also aggravated an already high- macroeconomic stability since May 2023. The interest rate environment for businesses, particularly government started to move towards market-based micro, small and medium enterprises (MSMEs). With so pricing of gasoline to address the large fiscal cost of many constituencies having benefited from the previous subsidized pricing. The CBN initiated major FX policy approach, especially the elite, there has been intense reforms that resulted in a unified, better regulated, and political pressure to regress to the previous policies, market-reflective official exchange rate. Exchange rate despite their unsustainable cost and the fact that they viii STAYING THE COURSE: Progress amid pressing challenges unfairly benefited mainly a lucky few at the expense of improving, with the Federal Government's fiscal deficit ordinary Nigerians, holding Nigeria’s economy back, narrowing from 6.2 percent of GDP in H1 2023 to 4.4 misdirecting scarce fiscal resources, and preventing percent in H1 2024, helping to mitigate debt-related poverty reduction. risks, re-anchor inflation expectations, and restore confidence in the economy. FX reserves – a buffer against Although it is still early, positive results from the external shocks – have risen from US$32.9 billion at improved policies are starting to show (Figure O.1.). the end of 2023 to more than US$38.5 billion by early Output growth has remained modest overall, but inched October 2024. The real exchange rate has dropped to higher through mid-2024 as oil sector output has historical lows, correcting the previous overvaluation of stabilized and activity in some services has been robust. the official rate, and enhancing Nigeria's international Inflation, though still high at 33.4 percent in July 2024 competitiveness, providing an historic opportunity for on a year-on-year basis (yoy), fell for the first time in Nigerian products and services to compete with imports nineteen months, and edged lower again in August to and tap export market opportunities. 32.2 percent. Whilst still fragile, the fiscal position is Figure O.1. A snapshot of Nigeria’s economic situation A. Growth has been resilient, with a slight tick up B. …inflation remains high, but has been in the most recent quarter… decreasing since July Real GDP (percent change, y/y) Inflation Rate (%) 6.0 50 45 4.0 40 35 2.0 30 0.0 25 20 -2.0 15 10 -4.0 5 -6.0 0 Mar-19 Jan-20 Mar-20 Jan-21 Mar-21 Jan-22 Mar-22 Jan-23 Mar-23 Jan-24 Mar-24 May-19 Jul-19 Sep-19 Nov-19 May-20 Jul-20 Sep-20 Nov-20 May-21 Jul-21 Sep-21 Nov-21 May-22 Jul-22 Sep-22 Nov-22 May-23 Jul-23 Sep-23 Nov-23 May-24 Jul-24 -8.0 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 m-o-m, SAAR y-o-y C. …the FGN’s fiscal deficit shrank in H1-2024… D. … and gross foreign reserves have increased 10 Fiscal balance (% of GDP) Gross external reserves (US$' billion) 40 9 39 8 38 7 37 4.4 6 6.2 36 6.3 5 35 4.7 4 34 33 3 32 2 31 1 30 1/3/23 2/3/23 3/3/23 4/3/23 5/3/23 6/3/23 7/3/23 8/3/23 9/3/23 10/3/23 11/3/23 12/3/23 1/3/24 2/3/24 3/3/24 4/3/24 5/3/24 6/3/24 7/3/24 8/3/24 9/3/24 10/3/24 0 H1-2021 H1-2022 H1-2023 H1-2024 Deficit Revenues Expenditures Sources: NBS, CBN, OAGF, DMO, World Bank estimates ix NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 The indications that the macroeconomic situation is on standard tools—i.e. MPR anchoring via open improving are encouraging, providing oxygen to the market operations and standing facilities—rather than economy and the necessary condition for growth to prudential instruments, to improve policy transmission ignite, with the help of additional, complementary and ease financial repression. Strong coordination measures. Sustaining the new direction of policies will between monetary and fiscal policy, with the latter continue to open space for the takeoff in investment and reducing borrowing pressures sufficiently, is necessary to jobs which Nigeria urgently needs, and which in turn rebuild confidence and reduce inflation. will further reinforce the improvement in the external and fiscal positions. If they can be sustained, and Exchange rate policy should continue to be geared complemented with measures to address long-standing towards maintaining a unified, market-reflective structural constraints and spur investment, growth, and exchange rate, whilst deepening the FX market. The jobs, Nigerians will start seeing the benefits of the new CBN should continue efforts towards deepening the direction in their daily lives. official FX market, including by facilitating formal remittances inflows, allowing international oil companies Sustaining and deepening reforms to fully concentrate their FX sales in the official market, is essential to maximize gains, while restoring intermediated market access to bureaux intensifying support for the poorest de change, and refraining from ad-hoc FX auctions. households to cope with inflation, and Allowing market participants to trade FX with more expand opportunities flexibility across time would also contribute to deepening the FX market. In addition, continuously reaffirming Table O.1., below, summarizes the progress made and the commitment to exchange rate flexibility, adopting a immediate priorities to build upon Nigeria’s macro- comprehensive, systematic, and transparent framework critical reforms. for CBN FX interventions, and building reserves, would contribute to anchoring exchange rate expectations to The monetary policy stance needs to remain tight fundamentals, rather than to perceived targeted rate until a sustained disinflation path is achieved, along levels. Maintaining the single, market-reflective exchange with continued improvements in policy transmission. rate is crucial to increase fiscal revenues (from oil and Maintaining a tight enough monetary policy stance taxes on other export-related profits, customs, and VAT is critical to keep market interest rates positive in on imports), attract investment, build external reserves, real terms, temper FX demand, and lower inflation and, in turn, set the conditions for investment and expectations. Furthermore, it is essential that the CBN’s inclusive growth. commitment to not reverting to inflationary ways and means advances as in the recent past should be upheld. On the fiscal front, focus on four key areas can The CBN could clearly communicate that the recent reduce debt risks and create more space for amendment of the CBN Act to increase the limit from development and pro-poor spending. First, and 5 to 10 percent of previous year’s revenue does not imply building on progress toward market-reflective pricing, a renewed recourse to ways and means. Rather, the legal it is essential to address the remaining implicit PMS requirement to retire outstanding balances at the end of subsidy by allowing retail prices to adjust periodically each year and use this facility only for limited, temporary in line with market fundamentals (i.e., exchange rates liquidity mismatches remains. Ways and means balances and international prices). This would open the PMS (principal and interest) should be systematically market to competition and boost Federation revenues. reported on with less of a time lag. Monetary policy Second, continued progress on non-oil revenue growth implementation should also rely progressively more through tax reforms and improved administration is x STAYING THE COURSE: Progress amid pressing challenges vital; Nigeria's tax revenues of 3.8 percent of GDP in benefits to households, including quick scaling up of 2023 remain extremely low by international standards. programs in response to shocks; and (iii) accelerating Third, reducing governance costs and redirecting the roll-out of social protection measures, including inefficient spending toward more targeted, pro-growth, the direct benefits transfer program, to counteract and pro-poor initiatives is crucial for supporting the purchasing power losses and hardships. poor, boosting long-term growth, and effectively communicating burden-sharing to the population. Macroeconomic stabilization creates a new platform Fourth, ensuring realistic budgets and avoiding the re- and historic opportunity to ignite growth and job emergence of unbudgeted financing needs is necessary creation, if supplemented by progress on addressing to prevent a return to ways and means financing, which long-standing structural constraints. Reducing trade should be reserved for short-term liquidity support and barriers can play a key role in reducing prices and kept within stipulated legal limits. boosting Nigeria’s competitiveness. The removal of the FX ban on 43 product lines, the temporary removal In parallel with stabilizing the macroeconomy, it of tariffs on food products, and the re-launch of the is critical to protect the poor and the economically single window are positive initial steps. Alongside the insecure by enhancing the social protection implementation of these measures, further actions framework. So far, a social registry has been developed, should remove import bans on food and cleaning covering over 18 million households (making it one products, apparel, and fertilizers, as well as and align of the largest in the world), and time-bound, shock tariffs with the ECOWAS Common External Tariffs responsive, direct benefit transfers of NGN 25,000 (CET). Longer-term efforts on external trade should are being rolled out to 15 million households (directly focus on tariff transparency, reducing non-tariff barriers, benefiting over 60 million Nigerians) for a period of and improving trade facilitation through better risk 3 months. The authenticity of the individuals is being management and audits. Improving competition policy validated through the National Identification Number and its enforcement would bolster the benefits of lower (NIN) or the Bank Verification Number (BVN) before import barriers in reducing prices and fostering growth, making payments directly into recipient bank accounts. as would increasing access to finance to productive firms. To date, 4.4 million households have received at least Transport and digital infrastructure investments should one payment tranche and 0.8 million have received a increase, in partnership with the private sector, to better second tranche. While the NIN/BVN requirements help integrate the domestic market, and allow businesses authenticate individuals and ensure that the payments to expand. Increasing access to reliable power supply go to the authenticated individual, the low coverage of and reducing insecurity, from banditry to informal NIN/BVN among the poor and vulnerable population checkpoints along trade corridors, are also essential has adversely impacted the pace of the rollout of the to boost job creation. Sustained investments and direct benefit transfers. There is an urgent and critical institutional strengthening would enhance state capacity need to ensure that the poor and vulnerable population to deliver health and education to the population, from the social registries are quickly enrolled into the especially in poorer regions. NIN/BVN, so that the direct benefit transfers can reach them. Over the medium term, there is a pressing need to accelerate and enhance social protection by: (i) ensuring Productive jobs are essential for poverty that the social registry continues to increase in coverage reduction and becomes dynamic to reflect the current status of the households; (ii) ensuring that the social protection Without jobs, poor Nigerians will not be able to system has a wide coverage and provides adequate escape poverty. Poverty is high and rising in Nigeria. xi NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 More than half of the population lives in poverty1. This the skills of Nigeria’s workers match the current needs of partly reflects the modest overall pace of economic the labor market. growth, which is insufficient to compensate for the erosion of purchasing power brought about by inflation. Short- and medium-run policies to boost productivity Yet, it also reflects the non-inclusive structure of growth: in farm and non-farm household enterprises would even when GDP was expanding more rapidly in the provide relief while higher-paying jobs are not early 2010s, richer households benefited more. Jobs hold available, and could support some to succeed and the key to sharing the proceeds of growth. Since Nigeria grow. Most farm and non-farm household enterprises has a young and growing population, the jobs that can are currently small scale, rarely employing individuals harness the country’s potential “demographic dividend” from outside the household. Supporting these household are needed now. enterprises relies on many of the foundational policies, especially the bedrock of basic infrastructure, but also However, employment on its own is not enough to lift goes beyond these. Like other firms, they need to be people out of poverty: Nigeria needs productive jobs, able to access the inputs they require – including tools, but these are scarce. In Nigeria, as in many countries, fertilizer, and productive, climate-resilient crop varieties high employment and high poverty coexist. In-work for farmers – for which improved access to finance may poverty is common as many jobs do not generate also help. In addition, they need to reach output markets earnings that are high enough to escape poverty. Low to foster commercialization and productivity growth. incomes are symptomatic of low productivity jobs. Nigeria’s labor market is changing – with employment Policy initiatives for women and youth can improve shifting from agriculture to services – but these changes the labor market’s poverty-reducing potential. are not increasing overall productivity and living Initiatives that cover mostly highly-formalized wage standards, because many of the new service-sector workers – including policies on public sector jobs jobs are in low-productivity sub-sectors like retail and and minimum wage legislation – only reach a small wholesale trade. segment of Nigeria’s poor and economically insecure population directly, as they do not have access to these Sustained poverty reduction depends on creating types of jobs. Such policies may also be fiscally costly, wage jobs through macro-fiscal stability, growth, given the large share of formal public sector workers. and private sector development, complemented by Focusing on excluded workers offers a clearer avenue for building human capital. Wage jobs are associated with reducing poverty. Women and youth have lower access escaping poverty, but they remain rare: just 13.6 percent to productive jobs than the rest of the population, so of employed Nigerians are primarily engaged in wage supporting better labor market outcomes for them is work. Addressing the urgent need for more wage jobs key. Gender-sensitive policies include: (1) keeping girls depends on the foundations of macro-fiscal stability in school, (2) improving provision of childcare, and and growth. This entails establishing the conditions (3) overcoming restrictive gender norms that prevent for private sector development – boosting market women participating in the labor market through access, increasing openness to trade, and promoting economic empowerment interventions combined with a better business environment can all help. This must trainings and community sensitization. For Nigeria’s vast be complemented by other long-run efforts to reduce youth population, policies to (1) support skills and job poverty, including building human capital and ensuring matching, (2) manage external migration including by helping young emigrants reach destination countries that 1 Based on projections using the 2018/19 Nigerian Living Standards Survey (NLSS) and the national poverty line. xii STAYING THE COURSE: Progress amid pressing challenges seek their skills, and (3) provide fallback employment – job creation potential – can help improve access to including by ensuring that public investments consider productive jobs. xiii NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Table O.1. Progress with Key Economic Reforms since December 2022 (I), and the Immediate Top Priorities to Deepen the Reforms (II) (I) REFORM PROGRESS HEATMAP (II) MEASURES TO SUSTAIN AND DEEPEN THE KEY REFORMS REFORMS NDU NDU NDU NDU Oct- Dec-22 June-23 Dec-23 24 (A) MONETARY POLICY • Maintain positive real ex-ante policy rates. • Ensure policy rates place a floor under short-term Maintain tight monetary policy to lower market interest rates. inflation • Rely more on policy rates and standard instruments (MPR anchoring, via OMOs and SDF/SLF), rather than on prudential instruments (e.g., CRR). • Have realistic budgets to avoid unbudgeted financing Avoid resorting to deficit monetization, requirements. including continuing to avoid Ways & • Increase the timeliness and detail level of information Means Advances on the Ways & Means Advances balance and interest paid on it, and on the CBN’s overall balance sheet. Improve balance sheet transparency • Publish the 2023 audited financial statements. • Provide details on net FX reserves. (B) FISCAL POLICY • Adopt a plan to fully achieve and maintain a cost- Eliminate the PMS subsidy reflective PMS price. • Include any implicit PMS subsidy in the budget. • Reform the VAT regime and rationalize tax Strengthen non-oil revenues expenditures. • Improve tax administration by adopting an e-invicing system and strengthening tax audits. • Improve the reporting of oil revenues to FAAC. Increase transparency of oil revenues • Conduct an audit to reconcile what is owed by the NNPC to the Federation, and vice versa. Phase out the FX subsidy • Ensure that all FX-related transactions occur at the market-determined exchange rate. • Cut wasteful expenditures that are not essential, Reduce the cost of governance such as purchase of vehicles, external training, etc. • Reduce the cost of collection of MDAs/GOEs. (C) FOREIGN EXCHANGE POLICY Maintain a unified, market-reflective • Communicate and implement a comprehensive, exchange rate systematic framework for CBN FX interventions to provide clarity to market participants as to when and how CBN may buy or sell FX. • Focus on transparently supporting market liquidity and price discovery. Concentrate FX transactions in the • Take measures to build liquidity in the NAFEM, official market including by easing remaining restrictions, and channeling oil-related inflows to the market. (D) TRADE POLICY Reduce trade restrictions that increase • Lift import bans. prices and poverty • Eliminate tariff deviations from ECOWAS CET. • Adopt and implement a compliance trade program. (E) PROVIDE URGENT RELIEF TO THE POPULATION • Accelerate the roll out of targeted cash transfers. Scale-up and provide relief to the • Allocate savings from PMS subsidy removal to population sustainably expand cash transfers and other well- targeted support. Legend Weak Semi-weak Average Semi-strong Strong xiv PART 1: Recent economic developments and the outlook for Nigeria Please note that projections of economic variables presented in this section of the Report are based on data and information only up to September 13, 2024. NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Nigeria's economic landscape has been impacted by structural reforms can further unwind the long-standing past policy missteps and external shocks, weighing constraints to private sector development and unleash on growth, and resulting in increased poverty. faster growth. Against the backdrop of large exchange Recognizing the urgent need for change, the government rate and price increases in Nigeria and other economies has embarked on bold but challenging macroeconomic (such as Egypt), there is a need to exercise caution when reforms since mid-2023 to rein in inflation, normalize estimating the size of the Nigerian economy relative to access to foreign exchange, and remove fiscally other economies, and such estimates should not be based unsustainable, regressive, and distortionary subsidies. on nominal US dollar GDP (Box 1.1). Nigerians have experienced intensifying hardship, as the needed price and exchange rate adjustments have added Amidst ongoing reforms, economic growth has to cost of living pressures, whilst confidence, investment, remained moderate, but resilient, driven by the jobs and income growth, take time to gain traction on service sector (Figure 1.1 and Figure 1.2). GDP growth the back of improved policies and macroeconomic slowed to 2.9 percent in 2023 partly due to weak crude stability. Sustaining and deepening the reforms to oil production, a damaging currency demonetization maximize the gains from the difficult steps already taken, in the first quarter, and the spillovers from the 2022 while also intensifying support for poor and vulnerable floods. In per capita terms, real GDP growth averaged households to cope, offers a path forward. 0.7 percent between 2021-2023, still not reaching the pre-pandemic income level. The economy grew by 2.9 Part 1 of this NDU reviews recent macroeconomic percent in H1 2024 year-on-year (yoy), 0.5 percentage developments since the last edition in December points (pp) higher than H1 2023. Quarterly growth 2023. It begins by analyzing output growth dynamics, also picked up, from 2.8 percent yoy in Q1 2024 to sectoral contributions, and recent poverty trends. Next, 3.0 percent in Q2 2024. The services sector, especially it examines inflation trends and monetary policy actions. financial and telecommunication services, continued to The section then assesses Nigeria's external position, be the major driver of growth in the first half of 2024. including trade balances and foreign exchange reserves, Yet, a number of factors weighed on growth, including and reviews developments in the financial sector. It still subdued agricultural and manufacturing output. also explores fiscal and debt dynamics. The section Overall, regarding the major economic sectors: concludes with a medium-term macroeconomic outlook for Nigeria over the next three years, framed within • Agriculture: Agricultural output growth fell to 0.8 the global context, and offers recommendations for percent yoy in H1 2024. The sluggish growth largely strengthening the reform momentum. resulted from contractions in livestock production and a slowdown in crop production. The sector continues 1.1. Economic growth has been to be affected by unfavorable climatic conditions (low resilient, albeit only moderate rainfall in 2023 farming season and heatwaves in Q1 2024), insecurity in farming communities, and higher The conditions for economic growth have improved costs of imported farm inputs − such as fertilizer and with recent macroeconomic reforms. Monetary other agrochemicals following the naira depreciation. policy tightening and improved policy coherence, reforms to the FX market that resulted in a market- • Non-oil industry: The non-oil industrial growth reflective exchange rate, and the start of a revenue- decelerated from 2.9 percent in H1 2023 to 0.8 based fiscal adjustment, have improved macroeconomic percent in H1 2024. The growth of the manufacturing conditions for businesses to expand and create jobs. sector remained weak at 1.4 percent, as the sector faced Sustaining these reforms and building on them with rising cost pressures from FX depreciation, increased 2 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges interest rates, and higher PMS prices, along with estimate of 1.8 mbpd (including condensates) and ongoing structural challenges like power shortages and OPEC's quota of 1.5 mbpd (excluding condensates). a difficult business environment. The food and beverage and cement sub-industries were the main drivers of • Services: The services sector remained the main growth, while coal mining, quarrying, minerals, oil driver of GDP growth, expanding by 4.1 percent yoy refining, textiles, apparel, and footwear all contracted. in H1 2024. Financial services grew by 31.9 percent Construction contracted by 0.8 percent yoy in H1 2024, yoy, the fastest in over a decade, driven by FX gains from marking its first decline since the 2020 recession. naira depreciation and higher interest income due to wider spreads from rising market rates. Information and • Oil: The oil sector growth accelerated from a communication services, the second largest contributor, contraction of 8.7 percent in H1 2023 to a growth grew by 5.7 percent, supported by ongoing expansion of 7.8 percent in H1 2024. The sector benefited in voice and data services. However, transportation and from a moderate increase in crude oil and condensates storage services contracted by 3.9 percent, while trade production which grew by 2.9 percent in H1 2024 to 1.5 services growth remained weak at 1.0 percent, below H1 mbpd. Despite the increase in average crude production, average of 2.5 percent between 2011-19. it remains below the Federal Government's 2024 Budget Figure 1.1. GDP growth has been resilient to Figure 1.2. …mainly driven by services, helped in recent shocks and edged up in Q2 2024… H1 2024 by stabilizing oil output Contributions to Real GDP Growth(%,pp) Real GDP (percent change, y/y) 5.0 6.0 4.0 4.0 3.0 2.0 2.0 0.0 1.0 -2.0 - -4.0 -1.0 -6.0 -2.0 -8.0 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 -3.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 H1 2024 Agriculture Oil Industry Non-oil Industry Services Net indirect taxes GDP growth Sources: NBS and UN Sources: NBS Multiple shocks in a context of high economic 2018/19 and 2024. Several shocks have contributed to insecurity have deepened and broadened poverty, with this major increase and changing profile of the poor: the over 115 million Nigerians estimated to have been COVID-19 recession, natural disasters such as flooding, poor in 2023. Since 2018/19, an additional nearly 35 growing insecurity, the high cost of the demonetization million people have fallen into poverty, so that more policy in Q1 2023, high inflation, and low economic than half of Nigerians (51.1 percent of the population growth. Previous domestic policy missteps compounded in 2023) are now estimated to live in poverty. While the effects of the shocks, particularly rising inflation, the majority of the poor people (61.9 percent) still eroding the purchasing power, especially of urban live in rural areas, poverty has become an increasingly urban plight, with the share of urban population living in poverty rising from 18.0 to 31.3 percent between PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 3 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 households, pushing many into poverty. The government is ramping up the cash transfer programs to support economically insecure households to help weather the crisis. Box 1.1. The difficult task of correctly evaluating the relative size of Nigeria’s economy Countries compile and release Gross Domestic Product (GDP) estimates in their respective local currency units (LCU), such as in the Nigerian naira. To compare the GDPs of different countries, the LCU GDP estimates need to be converted into a common currency. Purchasing power parities (PPPs) are the preferable currency conversion factor for comparing the relative size of volume or output, i.e., the GDP, of different countries. This is because PPPs control for price level differences between countries, unlike market exchange rates (MERs). Countries compile their GDP estimates reflecting their national prices. As large differences in price levels can exist between countries, especially for non-traded products, such as services, MER-converted GDP estimates do not accurately measure the relative sizes of economies. If no account is taken of the price level differences when converting GDP to a common currency, the size of higher-income economies with high price levels will be overstated, and the size of lower-income economies with low price levels will be understated (Figure B1.1). Figure B1.1. Lower-income economies are larger when price levels are taken into account Share of Global PPP-Based GDP, Share of Global population and Share of Global Market Exchange Rate-Based GDP By Regional and Income Group 2021 Low income Lower middle income Upper middle income High Income Sub-Saharan Africa South Asia North America Mid dle East & North Africa Latin America & Carbean Europe & Central Asia East Asia & Pacific 0 10 20 30 40 50 60 70 Percent Share of global population Share of global market exchange rate-based GDP Share of global PPP-based GDP Source: World Development Indicators, ICP 2021 4 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Box 1.1. Cont. In addition, MERs typically fluctuate over time and can exhibit significant volatility over a short period of time, whereas PPPs are more stable. These fluctuations in MERs, especially in the short term, can translate into similarly widely differing GDP estimates when the MERs are the chosen conversion measure. MERs are determined by the total demand for a particular currency, and financing foreign trade and capital transfer are components of this demand. In general, multiple factors, including changes in government policies and market speculation, can impact the MERs. The fluctuations in MERs, especially short-term volatility, do not necessarily reflect actual changes in the relative output of the economies, but rather changes in the currencies’ valuations against each other. These fluctuations are not a factor in the PPP-based GDP estimates, as they are based on observed expenditures and prices3. Figure B1.2 shows that MER-based estimates of Nigeria’s share of GDP for Africa fell from around 16% to under 13% between 2021 and 2023, and both Egypt and South Africa have larger GDP shares under this measure in 2023. This is related to the sharp increase in the official exchange rate between the Nigerian naira (NGN) and US dollar (USD). During this period, the official USD/NGN exchange rate rose from 399.41 to 646.13 (a 38% depreciation of the naira). Conversely, PPP-based estimates of GDP show Nigeria’s output accounted for around 15% of the regional total for all three years and was consistently the second- largest economy in Africa (behind Egypt) during the observed period. GDP estimates for 2024 are scheduled to become available in July 2025 through the World Bank World Development Indicators (WDI). So far in 2024, Africa largest economies, including Egypt and Nigeria, experienced further, large increases in their nominal exchange rates against the US dollar as well as in domestic prices due to the high inflation. Furthermore, in Nigeria, the gap between the official and parallel market exchange rates closed in February 2024, facilitating price discovery and foreign exchange (FX) supply, which is expected to be positive for trade, investment, and growth. Overall, comparing and ranking the value of economic activity amongst African economies against a volatile price backdrop should be done cautiously. Such comparisons should not be based on official MERs. 3 PPPs are estimated by the International Comparison Program (ICP) based on national accounts expenditures and prices of goods and services surveyed within each country. The most recent results were published in May 2024 for the reference year 2021. PPP time series estimates in major international databases, such as the World Bank’s World Development Indicators and International Monetary Fund’s World Economic Outlook, are based on ICP’s benchmark PPPs. The ICP is one of the world’s largest statistical initiatives, coordinated by the World Bank under the auspices of the United Nations Statistical Commission (UNSC), through an established governance framework. The ICP relies on a partnership of international, regional, sub-regional, and national statistical agencies—including the African Development Bank (AfDB), the Asian Development Bank (ABD), the Interstate Statistical Committee of the Commonwealth of Independent States (CIS-STAT), the United Nations Economic Commission for Latin America and the Caribbean (UN-ECLAC), the United Nations Economic and Social Commission for Western Asia (UN-ESCWA), the Statistical Office of the European Union (Eurostat) and the Organisation for Economic Co-operation and Development (OECD). The Nigerian National Bureau of Statistics (NBS) is an active partner in the ICP’s global collaboration, collecting and compiling these data for each ICP cycle. The AfDB is the coordinating body for ICP activities in Africa. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 5 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Box 1.1. Cont. Figure B1.2. Comparing Africa’s three largest economies, 2021-23 Share of regional PPP-based GDP and regional market exchange rate-based GDP, for the three largest African economies 25 20 15 10 5 0 PPP-based GDP share Market exchange rate- PPP-based GDP share Market exchange rate- PPP-based GDP share Market exchange rate- based GDP share based GDP share based GDP share 2021 2022 2023 Egypt, Arab Rep. Nigeria South Africa Source: World Development Indicators, ICP 2021 1.2. Monetary policy has improved sapping confidence in the naira and pushing up inflation. markedly, and inflation has begun As a result, inflation was surging, even before the series of to fall reforms which began in mid-2023, reaching 22.4 percent yoy in May 2023. A series of macroeconomic policy missteps in 2015- 2023 contributed to an inflation surge in Nigeria Monetary policy effectiveness also weakened, as CBN (Box 1.2). Up until 2014, headline inflation was broadly started employing prudential and regulatory tools stable, in high single digits or low two digits, not so for monetary policy purposes. To stimulate credit distant from the levels observed in other major emerging provision, CBN imposed a minimum loan-to-deposit markets (Figure 1.3). From 2015, however, the CBN ratio to banks (instead of a prudential maximum) and shifted its primary focus away from price stability – its restricted access to its standing facilities, where banks core mandate – ostensibly towards growth objectives, can obtain or park liquidity. Conversely, it imposed by providing large amounts of credit to households extraordinarily high cash reserve requirements (CRR) to and firms at subsidized rates, as well as prohibiting mop up liquidity. High pressure for lending combined access to FX to import over 900 product lines. Large with constrained allocation options led to artificially low and unbudgeted fiscal deficits, as well as the costs government borrowing costs and market rates, which lost associated with maintaining an overvalued exchange rate, the monetary policy rate (MPR) anchor (Figure 1.4). increasingly subjugated monetary policy to financing fiscal deficits, including through deficit monetization Under its new leadership, the CBN has taken through Ways and Means Advances. The money supply bold steps to reverse the harmful previous policy increased at a very rapid pace between 2015 and 2023, framework. Crucially, the CBN committed to stop 6 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Figure 1.3. Misguided policies contributed to an Figure 1.4. Market rates progressively lost the inflation surge in Nigeria from 2015 MPR anchor, as transmission channels weakened Treasury Bills- YTM, OBB, MPR (%) Inflation rate (yoy) 35 30 30 25 25 20 20 15 15 10 10 5 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 0 Jan-16 May-16 Jan-17 May-17 Jan-18 May-18 Jan-19 May-19 Jan-20 May-20 Jan-21 May-21 Jan-22 May-22 Jan-23 May-23 Jan-24 May-24 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 Sep-24 Nigeria India Indonesia South Africa Kenya MPR OBB T-bill, 1 year, YTM Sources: NBS and WDI Sources: CBN Note: OBB= open buy back; YTM= yield-to-maturity. T-bill yields are at issuance. monetary financing of the fiscal deficit (see fiscal Although inflation started to decline, the battle is far developments section) and halted new development from over. After reaching a 28-year high of 34.2 percent finance interventions, which were inconsistent with its year-on-year (yoy) in June 2024, headline inflation price stability mandate. The monetary policy stance has began to decline in July, falling further to 32.15 percent also been significantly tightened. The newly constituted in August 2024. This was supported by base effects and a Monetary Policy Committee (MPC) raised the MPR slowdown in the month-to-month (mom) pace of price by a combined 850 basis points to 27.25 percent increases since March due to tightened monetary policy. between January and September 2024 and improved the However, while mom inflation peaked in February flexibility and level playing field of the CRR, although 2024, it remains elevated, running at an annualized pace it remains exceptionally high at 50 percent to drain of about 27 percent (Figure 1.5). Higher food prices domestic liquidity. Importantly, the CBN has followed are particularly in focus, contributing 60 percent of the through on the MPC’s decisions with large open market consumer price index increase in the 12 months leading operations (OMOs) at rates close to the MPR. In the to August 2024, compared to the 52 percent weight of first eight months of 2024, OMOs amounted to over food in the CPI basket (Figure 1.6). The surge in food NGN 6.6 trillion, 30 percent more than in the three prices is attributed to significant increases in key staples previous full years combined. The monetary policy such as rice, garri, bread and wheat, which have more stance was tightened further by increasing the standing than doubled as of August 2024. deposit facility rate from -300 bps around MPR to -100 bps, while the standing facility rate increased to MPR +500 bps. Consequently, market rates have been re- anchoring to the MPR recently (Figure 1.4). The new monetary policy framework has also attracted FX inflows and drained naira liquidity, contributing to solidify the FX reform (see external sector developments below). PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 7 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 1.5. Monetary policy correction has started to reduce inflation, though the pace of price Figure 1.6. …especially for food prices increases is still high… Inflation Rate (%) Inflation Components (%, y-o-y) 50 45.0 45 40.0 40 35 35.0 30 30.0 25 20 25.0 15 10 20.0 5 15.0 0 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 Oct-23 Apr-24 Jun-19 Feb-20 Jun-20 Feb-21 Jun-21 Feb-22 Jun-22 Feb-23 Jun-23 Feb-24 Jun-24 Aug-19 Dec-19 Aug-20 Dec-20 Aug-21 Dec-21 Aug-22 Dec-22 Aug-23 Dec-23 Aug-24 10.0 5.0 m-o-m, SAAR y-o-y Oct-21 Apr-22 Oct-22 Apr-23 Oct-23 Apr-24 Jun-21 Aug-21 Dec-21 Jun-22 Aug-22 Dec-22 Jun-23 Aug-23 Dec-23 Jun-24 Aug-24 Feb-22 Feb-23 Feb-24 Inflation Energy Food CPI Core (excl. food and energy) Sources: NBS Sources: NBS Box 1.2. Quantifying long-term drivers of inflation Inflation in Nigeria has been largely determined by macroeconomic fundamentals. Broad money supply grew 13 percent on average in 2018-2023, significantly above that of real GDP, 1.8 percent. This expansion was largely driven by monetization of fiscal deficits through Ways and Means, which reached 11.5 percent of GDP in May 2023, right before being securitized; up from 4.2 percent back in 2018. The relentless rise in import prices and the loss of credibility of CBN’s focus on price stability pushed up inflation expectations. Increased naira liquidity was met by a fall in FX inflows, specially from oil exports and foreign investors, which led to nominal exchange rate depreciation pressures. As the official exchange rate was increasingly and artificially overvalued, supply of FX at official rates dried up. Demand for FX was displaced to the parallel market and the more market-reflective parallel exchange rate soared, feeding into inflation. Changes in input costs, notably oil, also contributed to higher inflation An error correction inflation model allows to quantify the effects of the main inflation drivers. While rising structural constraints and price shocks have impacted inflation, the preferred estimates indicate that the main long-term drivers of inflation until 2023 were money supply growth, inflation expectations – anchored on persistently high past inflation – exchange rate depreciation, and input costs, in particular oil (Figure B1.3). The estimates point to a large effect of inertial inflation, highlighting the importance of a sufficiently persistent and tight monetary policy stance to re-anchor inflation expectations. Similarly, the contribution of exchange rate depreciations to headline inflation is sizeable, particularly in recent years. A 10 percent higher USD/NGN exchange rate is estimated to increase aggregate price levels by 2 percent (i.e., 20 percent pass- through)4. 4 Caveats to this estimation include endogeneity concerns that could arise from possible omitted variables and simultaneity. Time series on Nigeria are quite short, so a balance must be struck between comprehensiveness and statistical properties when estimating the main drivers of inflation. Similarly, reverse causality could bias estimators, for instance, if the exchange rate affects inflation, but the latter also affects the former. The parsimonious model, however, restricts the scope for biases in the estimators. 8 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Box 1.2. Cont. Figure B1.3. Macroeconomic imbalances were the main contributors to inflation Contribution to headline inflation (pp) 25 20 15 10 5 0 -5 -10 20 0 20 1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 1 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 1 20 2 23 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 20 Oil M2 Parallel rate CPI (-1) Residual Sources: World Bank Note: Oil= Crude oil price; M2= broad money supply and CPI (-1) = previous years consumer price index. 1.3. Reforms have successfully demand restrictions and declining FX supply through achieved a unified, market- the official channels pushed businesses and households reflective exchange rate and the into the parallel market to meet their FX requirements external position is improving and generated arbitrage and rent-seeking opportunities. Prior to the reforms, as of June 2023, the parallel Major reforms achieved a market- market-NAFEX premium was 60 percent, indicating a reflective exchange rate in the official FX significant overvaluation of the NAFEX rate. market Far-reaching FX policy reforms have been The previous exchange rate policy was opaque and implemented since June 2023, culminating in a imposed huge costs on the economy. The official market-reflective official FX market. In June 2023, rate – the Nigerian Autonomous Foreign Exchange the CBN unified all the FX windows into the Nigerian Fixing (NAFEX), determined at the Investors’ and Autonomous Foreign Exchange Market (NAFEM) Exporters’ (I&E) window – was tightly managed by the and initiated the adoption of a willing buyer-willing CBN due to moral suasion and did not reflect market seller principle for FX trades. Further major changes fundamentals. The FX market lacked a clear and in regulations at the end of January 2024 helped re- predictable price discovery mechanism due to the use establish a functioning official FX market; and the official of multiple FX windows to serve various purposes. FX brokerage, FMDQ, implemented a new spot exchange PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 9 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 rate daily fixing methodology, which excludes outlier Average daily turnover in the official market increased transacted prices. The CBN increased enforcement 226 percent (H1 2024 vs H1 2023) to $252 million. against practices of underreporting exchange rates used in FX trades, which had evolved in the market in The depreciation of the nominal exchange rate response to the previous policy regime. It also lifted caps corrected the previous overvaluation of the naira and on exchange rate spreads that were in place for some opens space for domestic production, including for market participants and cleared a backlog in FX claims of export markets. The real exchange rate, relative to the about US$4.4 billion that were assessed to be legitimate. US dollar, was 45 percent lower by June 2024 than the In addition, CBN stopped moral suasion which had average rate of 2020, reaching historical lows. The very previously sought to keep the official rate managed at a large nominal adjustment of the exchange rate more than certain level. As a result, the official exchange rate, and compensates for recent inflation differentials between the minimum and maximum intraday traded rates, Nigeria and the US, making the US dollar price of the have all converged around the market rate, eliminating naira in real (i.e., inflation-adjusted) terms the lowest it the parallel premium. An interbank FX market has also has been since at least the early 2000s. By making the FX- begun to emerge, contributing to a less volatile spot denominated price of Nigerian products much cheaper, exchange rate, along with the significant monetary policy the exchange rate enhances Nigeria's international tightening which began in February 2024. The NAFEM competitiveness and export potential, as well as creating has been attracting progressively more FX transactions. space for domestic producers to compete with imports, Figure 1.7. FX reforms closed the FX premium and Figure 1.8. The real exchange rate has staged a more than doubled turnover large adjustment Parallel and Official Rate (Naira/US$) and FX turnover(US$ million, rhs) Real Exchange Rate - USD (average 2020=100) 1800 10000 160 1600 9000 140 8000 1400 120 7000 1200 100 6000 1000 5000 80 800 4000 60 600 3000 40 400 2000 200 1000 20 0 0 0 Oct-22 Apr-23 Oct-23 Apr-24 Jun-22 Jan-23 Feb-23 Mar-23 Jun-23 Jan-24 Feb-24 Mar-24 Jun-24 May-22 Jul-22 Aug-22 Sep-22 Nov-22 Dec-22 May-23 Jul-23 Aug-23 Sep-23 Nov-23 Dec-23 May-24 Jul-24 Aug-24 Sep-24 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 l-0 l-0 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-1 l-2 l-2 l-2 l-2 l-2 Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju NAFEM turnover Parallel Rate Official Rate RER Parallel Index Sources: CBN, FMDQ, market surveys Sources: U.S. BLS, NBS, market surveys if accompanied by major structural reforms to lower the covering the years 2015 to 2022. Additionally, the CBN high costs of production. resumed publishing several key reports and analyses, which had been halted since 2020. These include details The CBN has also made strides in improving of FX interventions in the official market, the Purchasing transparency and communication, but further effort is Manager Index report5, the Business Expectations required. In August 2023, for the first time since 2014, Survey report6, and the Inflation Expectation Survey the CBN published its audited financial statements, report7. Building on these significant improvements in 5 https://www.cbn.gov.ng/Out/2024/STD/2024%20SEP%20%20PMI%20REPORT%20FINAL.pdf 6 https://www.cbn.gov.ng/Out/2024/STD/BES%20Report%20July%202024.pdf 7 https://www.cbn.gov.ng/Out/2024/STD/Aug%202024%20IES%20Report%20final%20.pdf 10 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Figure 1.9. The exchange rate depreciation has transparency, it is crucial for the CBN to publish the compressed imports… 2023 audited financial statements and provide details Contributions to net exports (%GDP) on net FX reserves. Together, these actions would 80.0 60.0 further strengthen transparency and credibility, which 40.0 are essential for attracting investment and maintaining 20.0 economic stability. 0.0 -20.0 Larger current and financial account -40.0 surpluses are strengthening the external -60.0 position -80.0 -100.0 -120.0 The current account balance (CAB) moved further 2019 2020 2021 2022 2023 2024f Goods export (oil) Goods imports (oil) Goods export (non-oil) into surplus in 2023, driven by lower imports. The Goods imports (non-oil) Services (net) Net exports CAB increased 73 percent to US$6bn, as goods imports Source: CBN, WB staff projections decreased more pronouncedly following the exchange rate depreciation—though the trade balance was still Figure 1.10. The exchange rate depreciation has compressed imports… negative—and remittances remained high at 22.5 billion US dollars, amongst the highest in Sub-Saharan Africa Contribution to CAB (% GDP) 30.0 (SSA). While oil production increased, oil exports fell in US dollar terms. This trend continued into the first 20.0 half of 2024, when the CAB further to a surplus of 10.0 US$8.5bn, the highest mid-year balance since 2014, as 0.0 the trade deficit halved (yoy) and remittances inflows -10.0 increased 7 percent (yoy). -20.0 The financial account surplus saw a large jump on -30.0 the back of increased foreign portfolio investments -40.0 (FPI), FDI, and other investment flows on net bases. -50.0 The FAB increased markedly from 1.4 percent of GDP 2019 2020 2021 2022 2023 2024f in 2022 to 4.7 percent of GDP in 2023 as net FDI Net exports Net income Net transfers CAB moved from a negative position in 2022 into positive Source: CBN, WB staff projections territory and net FPI surged by 74 percent. As of the first half of 2024, the FAB was lower compared to the same period in 2023, due to negative net FDI and other investment flows. However, net FPI inflows increased in H1 2024 (yoy), in response to exchange rate reforms (which made the domestic currency more reflective of market fundamentals) and higher domestic debt security yields. FPI flows will likely remain very sensitive to relative yields in other markets. FDI remains extremely low and is expected to increase only marginally in the full year 2024, as banks strive to attract foreign capital investments to meet new capitalization requirements PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 11 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 1.11. Net FDI and FPI have grown… Figure 1.12. … but FDI to Nigeria remains very low compared to peer countries FDI, FPI and Other investments (Net, %GDP) FDI: Nigeria and Comparator Countries (% GDP) 4.0 10.0 3.5 8.0 3.0 6.0 2.5 2.0 4.0 1.5 2.0 1.0 0.5 0.0 2019 2020 2021 2022 2023 2024f 2025f 0.0 -2.0 -0.5 2020 2021 2022 2023 2024f FDI FPI Other investments SSA Oil producing EMDEs Nigeria Source: CBN, WB staff projections Source: CBN, WB staff projections announced in March 2024 (Figure 1.11). The FAB is errors and omissions figures are reported in Nigeria’s projected to reach 4.6 percent of GDP in 2024. balance of payments (BoP) accounts, making changes in reserves the key metric to gauge how Nigeria’s overall Gross external reserves are increasing. Gross reserves BoP position is evolving. For example, reserves declined (30-day moving average) increased from US$33.4bn at significantly in 2023 despite both the current and the end of 2023 to US$38.3bn at end-September. High financial account balances being in surplus. Figure 1.13. FX Reserves declined in 2023, despite Figure 1.14. …but are growing in 2024 CAB and FAB improvements… CAB (%GDP) FAB (%GDP), FX reserves (rhs, US$'b) Gross external reserves (US$' billion) 45.0 6.0 40 39 4.0 40.0 38 2.0 37 35.0 36 0.0 35 30.0 34 -2.0 33 32 25.0 -4.0 31 30 1/3/23 2/3/23 3/3/23 4/3/23 5/3/23 6/3/23 7/3/23 8/3/23 9/3/23 1/3/24 2/3/24 3/3/24 4/3/24 5/3/24 6/3/24 7/3/24 8/3/24 9/3/24 10/3/23 11/3/23 12/3/23 20.0 -6.0 10/3/24 2019 2020 2021 2022 2023 FX reserves FAB CAB Source: CBN Source: CBN 1.4. The financial sector remains deterioration in loan performance in terms of non- resilient despite the impacts of performing loans (NPLs) in the first quarter of 2024, recent shocks compared to the previous year, due to a challenging economic environment. The ratio of NPLs to total loans Nigeria’s banking industry, which dominates the increased by 0.6 pp to 5.1 percent in Q1 2024 compared financial system, remains resilient despite external to Q1 2023 (Figure 1.15). This ratio is marginally and domestic shocks. There has been a marginal above the prudential benchmark of 5.0 per cent. Banks, 12 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Figure 1.15. Banking system NPLs slightly breached the 5 percent threshold in Q1 2024 Non Performing Loans - NPL(%) 6 5 4 3 2 1 0 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Non Performing Loans Regulatory Threshold Source: CBN however, remain liquid with the industry liquidity ratio Other regulatory agencies are complementing the at 42.1 percent, well above the minimum regulatory CBN’s actions to protect depositors and enhance benchmark of 30.0 percent, indicating an adequate public confidence in the financial system. In May liquidity cushion of the banks and their ability to meet 2024, the Nigeria Deposit Insurance Commission with their obligations8. While profitability has slowly (NDIC) announced an upward review of the maximum improved, it is still well below pre-COVID-19 levels, deposit insurance coverage levels across various banks, and is concentrated in larger banks, which benefit from with immediate effect. In a coordinated move among lower funding costs and diversified income sources. the financial sector regulators, in June 2024, the SEC published its framework for the 2024 banking sector The banking system’s capital buffers have been eroded capitalization program to serve as a guide to the issuers due to high inflation, significant depreciation of the and capital market operators in filing applications for naira, and the increase in the NPL ratio. The capital capital raises or mergers and acquisitions. Additionally, adequacy ratio of the banking system was 11.1 percent in in July 2024, the Corporate Affairs Commission (CAC) Q1 2024, down from 14.2 percent in Q1 20239 (Figure issued new guidelines for the recapitalization, merger, 1.16). As a pre-emptive measure to shore up financial and share increment of banks and financial institutions resilience, the CBN on March 28, 2024, announced in Nigeria. new minimum capital requirements for the banking sector, with a 24-month implementation window. In line with its commitment to its core mandate of Following approvals from the Nigeria Securities and ensuring price stability as well as promoting a sound Exchange Commission (SEC), several commercial banks and stable financial system, the CBN has recently with international licenses have already initiated capital made a number of regulatory interventions. In January increase procedures in the market through rights issues 2024, the CBN replaced the boards and management or public offers10. teams of Polaris Bank, Union Bank, and Keystone Bank, 8 CBN Economic Report, February 2024. 9 CBN Quarterly Reports (2023& 2024). 10 Access Holding, Guaranty Trust Holding Company Plc, FBN Holding (Fidelity Bank) and FCMB Group Plc. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 13 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 1.16. Banks’ capital buffers have been eroded, but at system level remain above the minimum requirement Capital Adequacy Ratio - CAR(%) 16 14 12 10 8 6 4 2 0 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Capit al Adequacy Ratio CAR National/ Regional Banks Thr eshold Inter national Licensed Banks Thr eshold Source: CBN citing the banks’ regulatory non-compliance, corporate remains low, and a large part of the increase was likely governance failures, disregarding the conditions under driven by high inflation and valuation effects. Strong which their licenses were granted, and involvement in earnings generated from the substantial 18 percent activities that pose a threat to financial stability. In June spread between deposit and lending rates along with 2024, the CBN revoked the banking license of Heritage FX revaluation gains (due to net long FX balance sheet Bank, citing the bank's poor financial performance and positions) on Naira depreciation have supported banks' a situation that constituted a threat to financial stability. balance sheet growth. The large spread bolsters bank The NDIC was promptly appointed as the liquidator equity growth and can enhance banks' lending capacity, in line with Nigeria's bank resolution framework. at least in the short term. However, such large spreads According to the NDIC, at the time of its failure, also reflect shortcomings in the competitive landscape. Heritage Bank had 2.3 million depositors (99 percent of which had deposits under the deposit insurance coverage Deepening Nigeria’s non-bank financial sector will amount of NGN 5 million naira), total deposits of NGN also be vital to support higher investment and growth. 650 billion naira, and a loan portfolio of NGN 700 Nigeria’s shallow and concentrated capital market – billion naira. primarily focused on government securities and large corporates – poses a challenge to sustainable and inclusive Loan portfolios and loan-deposit spreads have growth. In terms of the public equity capital market, increased. The total loan portfolio of Nigerian banks the ratio of market capitalization to GDP as at end of increased by 50 percent between December 2022 March 2024 is estimated at 24 percent11 compared to and December 2023. However, credit intermediation 395 percent12 in South Africa. There are only 151 listed 11 National Bureau of Statistics, Nigerian Exchange, March 2024. 12 Department Statistics, South Africa, Johannesburg Stock Exchange, March 2024. 14 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges companies on the Nigerian Exchange, compared to 312 implementation of withholding VAT at source by certain listed on the Johannesburg Stock Exchange as of July sectors. The unification of the FX rate led to a significant 2024. In terms of debt capital, Federal Government revenue windfall, as various FX-denominated revenues (FGN) bonds account for about 85 percent13 of total used to be transferred to the Federation at the official debt capital market capitalization. Long-term finance rate, which was 53 percent lower than the parallel rate and patient capital are especially needed to support in 2022 (Box 1.3). This resulted in an estimated NGN the growth of MSMEs and help fund Nigeria’s large 6.2 trillion (3 percent of GDP) in forgone tax revenues. investment needs. Nigeria's pension industry has grown The cost of these forgone revenues was even larger than significantly over the last two decades, posting 20 percent the cost of the PMS subsidy, which had a fiscal cost average annual growth, with assets under management of NGN 4.5 trillion in 2022 (2.2 percent of GDP). of about NGN 20 trillion as of April 2024. Recent Additionally, dividends from parastatals rose by 0.3 legislation permits investment of up to 15 percent of percentage points of GDP, following the December 2023 total pension assets in infrastructure, but these assets are reform to standardize and automate fund remittances to less than 1 percent of the portfolio, in part reflecting the the treasury. scarcity of offerings. 1.5. A revenue-driven fiscal consolidation is accompanying the monetary policy tightening The fiscal position of the Federal Government improved in the first half of 2024, with the overall deficit narrowing to 4.7 percent of GDP, compared to 6.2 percent of GDP in the same period last year. This improvement was primarily due to increased revenues, largely from the non-oil sector, following the removal of the implicit foreign exchange subsidy and revenue gains from reforms that enhanced the transparency and accountability of how government-owned enterprises (GOEs) and ministries, departments, and agencies (MDAs) remit their statutory revenues. Meanwhile, expenditures edged lower as a ratio of GDP. Gains from FX unification, improved tax administration, and better management of revenue remittances from parastatals boosted non-oil revenues. Non-oil tax revenues to the Federation increased sharply by 1.7 percentage points of GDP in H1-2024 compared to H1-2023. This surge was driven by enhanced tax administration, including digital tax collection via the TaxProMax system and the 13 FMDQ, Debt Management Office. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 15 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Box 1.3. Quantifying the fiscal cost, through forgone revenues, of multiple exchange rates Prior to the full FX unification in February 2024, the presence of a parallel FX premium generated enormous fiscal costs, in the form of forgone revenues. This situation emerged because FX revenue inflows—such as oil and customs revenues, as well as a portion of domestic VAT and CIT which are paid in FX—were transferred to the treasury at the official exchange rate. However, due to the significant difference between the official and parallel market rates, the amount of naira-denominated revenue received by the Federation from FX- linked revenues was significantly reduced. The unification of the FX rate has therefore eliminated the forgone revenues that previously benefited certain groups at the expense of the entire nation. The implicit forgone revenues from the premium in the rate impacted five main revenue streams to the Federation: 1. Oil and gas revenues: Gross oil revenues are collected in FX, including crude oil and gas royalties, Petroleum Profit Tax (PPT), revenues from gas flaring, and other oil and gas revenue flows. 2. Import duties and excise duties on imported goods: Import duties and excises on imported goods are collected by the Nigeria Customs Service (NCS) in FX. 3. VAT revenues: VAT on imported goods and a significant share of VAT domestically are paid in FX. Combined, these two categories accounted for about 44.3 percent of net VAT revenues in 2021-2023 4. CIT revenues: Similar to VAT, about 40 percent of total CIT revenues collected by the Federation were paid in FX in 2021-2023. 5. GOE revenues: Several GOEs in Nigeria collect fees and levies in FX but remit revenues to the Federation in naira14. Unfortunately, data are not available for this category. The estimated implicit forgone revenues from the FX premium were even larger than the PMS subsidy, underscoring the importance of maintaining a unified FX rate. In 2022, when the cost of the PMS subsidy reached NGN 4.5 trillion (2.2 percent of GDP), the revenues forgone that emerged due to the large parallel rate premium are estimated to have been NGN 6.2 trillion (3 percent of GDP): NGN 4.5 trillion of FX revenue forgone from gross oil revenues and NGN 1.7 trillion from the FX revenue forgone from non-oil tax revenues (Figure B1.4). These findings demonstrate that the FX unification reform not only addresses distortions in the FX market and the real economy but also has a substantial impact on restoring fiscal space. Therefore, maintaining the unified FX rate which Nigeria has achieved since February 2024 is essential from a fiscal perspective. It should be noted that in addition to the large estimated fiscal benefits, the FX reform is also expected to benefit the economy by removing the large distortions the previous regime imposed, such as skewing the competitive landscape in favor of importers with preferential access to FX, making it more difficult and less profitable to export, and fueling rent-seeking and illicit activity. 14 Some of the GOEs that collect revenues in foreign currency include: Nigerian National Petroleum Corporation (NNPCL), Federal Airports Authority of Nigeria (FAAN), Nigeria Ports Authority (NPA), and the Nigerian Maritime Administration and Safety Agency (NIMASA). 16 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Box 1.3. Cont. Figure B1.4. The implicit FX subsidy was higher than the PMS subsidy FX vs PMS subsidy 7 60% 6 50% 5 40% 4 N trillion 30% 3 20% 2 1 10% 0 0% 2021 2022 2023 FX sub (VAT) FX sub (CIT) Fx sub (import duties) FX sub (gross oil revenues) Total FX subsidy PMS subsidy FX Parallel premium Sources: OAGF, NBS, CBN, survey of BDCs, and World Bank calculations Net oil revenues have increased, despite the implicit on a below-market naira exchange rate. In addition to subsidy on premium motor spirit (PMS, gasoline), the fiscal cost of the implicit fuel subsidy, the gains in due to substantial FX-related gains. Gross oil revenues gross revenues were also eroded by several deductions, are estimated to have risen from NGN 3.8 trillion (3.7 including the increased amount of pledged crude oil percent of GDP) in H1 2023 to about NGN 9.8 trillion being used by NNPCL to service loans it has acquired (8 percent of GDP) in H1 2024. This surge in gross in recent years. Overall, net oil revenues (including gains oil revenues has been driven largely by exchange rate from the FX rate unification) increased by 1.2 percentage effects: the unification of the FX rate, and the higher points of GDP in H1-2024. unified exchange rate. However, since August 2023, gasoline prices increased more slowly than import costs, Revenue growth was accompanied by expenditures which rose in local currency (naira) terms on account of edging lower as a share of GDP, mainly due to naira depreciation. This was because NNPCL fixed the under-execution of capital spending, which helped import value of gasoline in naira terms below the cost of offset rising interest payments. In H1 2024, FGN imports in US dollar terms at the market exchange rate, expenditures amounted to 8.5 percent of GDP (NGN effectively making it the de facto monopoly importer. 10.5 trillion), slightly lower as a share of GDP compared The below-cost pricing of gasoline imposed a renewed to the 9 percent (NGN 9.4 trillion) recorded in H1-2023. implicit subsidy cost on the Federation, estimated This relative stability in spending reflects two contrasting at about NGN 5.9 trillion (2.1 percent of GDP) in trends. On the one hand, capital expenditure (capex) 2024, as NNPCL’s fiscal transfers have also been based declined by 1 pp of GDP, with actual spending reaching PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 17 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 only 40 percent of the prorated budgeted amount for agreed to securitize the outstanding NGN 7.3 trillion the period. On the other hand, overhead costs rose stock of Ways and Means advances using market-based by 0.2 pp of GDP, and other expenditures, including debt instruments. To this end, the DMO increased funds allocated to cover the shortfall in electricity commercial borrowing and issued a cumulative NGN tariffs and other initiatives such as the presidential 12.8 trillion in debt securities (FGN bonds and NTBs) metering program, increased by 0.5 pp. Personnel costs as of early August to finance the fiscal deficit and repay remained steady as a share of GDP during this period, the stock of Ways and Means advances, which dropped which preceded the anticipated increase in the national by NGN 3.7 trillion in Q1 2024, to stand at NGN minimum wage, which is expected to raise government 4.4 trillion in March 2024. Relying on standard debt instruments not only eases inflationary pressures and is Figure 1.17. Revenues rose sharply in H1 2024… fundamental to restoring investor confidence, but also FGN revenues (% of GDP) 4.5 enhances debt transparency, improves debt management, 4.0 and importantly, reduces borrowing costs, as the cost of 3.5 Ways and Means financing is 3 pp higher than the MPR. 3.0 2.5 2.0 Nigeria has arrested the previous, rapid deterioration 1.5 1.0 in its fiscal position and debt sustainability risks, and 0.5 debt-related risk metrics are generally improving. 0.0 H1-2021 H1-2022 H1-2023 H1-2024 Public and publicly guaranteed (PPG) debt is estimated Net oil revenues Customs Corporate to increase from 49.1 percent of GDP at the end of VAT Independent revenues Total revenues 2023 to 50.8 percent in 2024, with the slight increase Sources: OAGF and NBS being mainly due to the FX valuation effect on external Figure 1.18. …while expenditure slightly dropped, debt. The debt burden has increased sharply in recent due to under-execution of capex years (it was 30.5 percent of GDP in 2019), but it is FGN expenditures (% of GDP) now on a declining trend helped by the major reforms, 10 especially those begun in 2023. Although Nigeria’s stock 9 8 of government debt remains moderate by international 7 standards relative to the size of its economy, the very low 6 5 revenue base means that the cost of servicing its debt 4 quickly crowds out productive spending and makes the 3 2 fiscal position vulnerable to debt-related risks. The debt 1 service-to-revenue ratio exceeded 100 percent in 2022. 0 H1-2021 H1-2022 H1-2023 H1-2024 Fortunately, this has declined alongside the improvement Personel Ov erhead Interest Other Capex Total expenditures in the fiscal situation and is expected to be 57.1 percent in 2024. The improving debt trajectory is primarily Sources: OAGF and NBS driven by higher revenues due to ongoing reforms and expenditures by approximately NGN 0.6-1 trillion the securitization of over 75 percent of the Ways and annually. Means financing stock into a long-term instrument with a significantly lower interest rate. Nigeria’s external debt In addition to the fiscal improvement, the authorities risk profile is helped by the fact that only 23 percent are following through on their commitment to stop of the total PPG debt stock is in foreign currency, and monetizing the deficit. In a positive development, mostly on concessional terms. Overall, the government’s the Federal Ministry of Finance (FMF) and the CBN debt remains sustainable, though it remains critical to 18 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges further strengthen the fiscal position, and especially the global activity strengthened in early 2024, largely driven revenue base, to reduce Nigeria’s vulnerability to adverse by solid U.S. economic expansion. Advanced economies shocks and to sustainably free up resources to spend on are expected to grow by 1.5 percent, though with development priorities. significant variation. Inflation has declined to the point where major central banks have begun to ease monetary Despite improvements in the fiscal situation, lack policy, notably the U.S. Federal Reserve which lowered of transparency in both the oil sector and the 2024 the federal funds rate by 50 basis points to 4.75 percent amended budget creates fiscal uncertainties. Opaque in September 2024. governance at NNPCL undermines the transmission of oil revenues to the Federation. Non-transparent Growth in emerging markets and developing reporting to the Federation Account Allocation economies (EMDEs) is expected to decline slightly Committee (FAAC) makes it difficult for authorities to from 4.2 percent in 2023 to 4 percent in 2024. oversee NNPCL’s performance, calculate expected oil However, excluding China, EMDE growth is projected and gas revenues, and reconcile the difference between to rise to 3.5 percent this year and firm to an average revenues received by the Federation and NNPCL’s of 3.9 percent in 2025-26. The contribution from total income. The reports submitted to FAAC are domestic demand in EMDEs is expected to weaken inconsistent and lack key information, such as pledged in 2024, mainly due to idiosyncratic factors in some revenues, the tradeable value of crude oil, actual large economies, but should strengthen over 2025- payments, and receipts from trade. Additionally, as 26 as inflation eases and financial conditions improve. noted in the Nigeria Public Finance Review (2022)15, Policy rates have been cut in many EMDEs. In China, quasi-fiscal activities—like in-kind crude oil revenues growth slowed in early 2024 and is expected to continue and direct cost deductions—further obscure financial weakening due to lower consumption and subdued reporting. Furthermore, unlike past practices when investment, with the ongoing property sector downturn the Budget Office of the Federation (BOF) published weighing on real estate investment. details of approved budgets, the government has not released information regarding the NGN 6.2 trillion Risks to the global outlook remain tilted to the amendment to the 2024 Appropriation Act, creating downside, despite some improvements since the some uncertainties about the future fiscal position. beginning of this year. Heightened geopolitical tensions and intensifying conflicts could disrupt 1.6. Economic Outlook: The economic activity, including if a conflict-related shock global economy is stabilizing and to global oil supply pushes prices higher, counteracting the prospects for Nigeria have the disinflation trend. Delays in disinflation could improved, albeit still fragile lead to postponed policy rate cuts, slowing growth. Additionally, weaker-than-expected growth in China, The global economy is stabilizing such as a prolonged property sector downturn, could have significant negative spillovers, especially for The global economy is stabilizing, following several EMDE commodity exporters. Rising trade policy years of overlapping negative shocks. Global growth uncertainty and restrictions also pose risks to trade and is projected to stabilize at 2.6 percent this year, holding economic activity. On the upside, faster-than-expected steady for the first time in three years (Table 1.1). Despite global disinflation, supported by stronger productivity high financing costs, geopolitical tensions, and conflicts, growth, could enable central banks to cut rates more 15 https://documents1.worldbank.org/curated/en/099615211172222358/pdf/P1750950fbd29d02008429007d1ed499d61.pdf PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 19 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 quickly, boosting growth. U.S. growth could also exceed industrial activity. Oil prices have fluctuated this year, expectations due to strong labor supply dynamics, driven trending substantially higher in April in the context of by higher labor force participation and the absorption of escalating tensions and conflict in the Middle East, but working-age migrants. subsequently pulling back in recent weeks. Metals prices, excluding those of precious metals, are projected to stay After a sharp decline between mid-2022 and mid- well above pre-pandemic levels, as weaker metals demand 2023, aggregate commodity prices have generally associated with lower real estate investment in China is risen in 2024 (Figure 1.18). The increase was likely to be counterbalanced by firming global industrial driven by tight supply conditions and signs of firmer demand and metals-intensive clean energy investments. Figure 1.19. Central banks have started cutting Figure 1.20. Commodity price indices are expected policy rates to remain broadly at 2023 levels Percent 12 Index, 100 = 2015-19 average 250 10 200 8 6 150 4 100 2 0 50 Jul-23 Jul-21 Jul-22 May-21 Sep-21 Nov-21 Jan-22 May-22 Sep-22 Nov-22 Jan-23 May-23 Sep-23 Nov-23 Jan-24 May-24 Jan-21 Mar-23 Mar-24 Mar-21 Mar-22 2019 2020 2021 2022 2023 2024f 2025f EMDEs AEs Energy Metals and minerals Agriculture Sources: Haver; World Bank. Notes: AEs =Advanced economies; EMDEs = Emerging Markets and Developing Economies. Left-hand figure: Unweighted average of nominal policy rates. Panel includes 16 AEs and 76 EMDEs. Last observation is June 2024. Right- hand figure: f indicates forecast. Table 1.1. Global and regional indicators, 2021–2024 2024f 2021 2022 2023e June 2024 January 2024 (current projection) (previous projection) Real GDP growth – Global economy (%) 6.3 3.0 2.6 2.6 2.4 Real GDP growth – Advanced Economies (%) 5.5 2.6 1.5 1.5 1.2 Real GDP growth – Emerging and Developing 7.3 3.7 4.2 4.0 3.9 Economies (%) Real GDP growth – Emerging and Developing 6.5 4.3 3.4 3.5 3.5 Economies excluding China (%) Crude oil, Brent (US$ per barrel)a 70.4 99.8 82.6 84.0 81.0 e = estimate, f = forecast. Sources: World Bank, Global Economic Prospects, June 2024, World Bank: Washington, D.C 20 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges Nigeria’s outlook: recent reforms are gains from closing the FX premium. Planned reforms expected to significantly improve to rationalize tax expenditures, improve VAT, enhance macroeconomic conditions into the tax administration, and progress towards eliminating medium term, but the economy is still the gasoline subsidy, will further boost revenues. On fragile the spending side, expenditures are expected to rise due to a higher wage bill from raising the minimum wage, Economic growth is expected to increase slightly in the increased capital investments in physical and human projection period (through 2027), as macroeconomic capital, and expanded social programs. Interest payments reforms are consolidated. GDP is projected to grow by on debt are expected to decrease as global and domestic 3.3 percent in 2024, rising to an annual average of 3.7 interest rates decline. Overall, revenue gains will exceed percent over 2025-2027, continuing to be largely driven spending increases, reducing the primary deficit from 1.8 by the services sector, particularly financial services, percent of GDP in 2023 to 0.2 percent by 2027, and telecommunications, and information services. While putting the debt-to-GDP ratio on a downward path. agricultural output is projected to improve over the medium term, enhancing agricultural productivity and The current account balance is expected to remain strengthening security will be critical to mitigating food in surplus at an average of 3.1 percent of GDP from insecurity and reducing poverty, especially in key food- 2025 to 2027, driven by a mix of increasing non- producing regions. The non-oil industry sector is likely oil exports, reduction in oil imports, and falling oil to experience modest yet steady growth, as manufacturers exports. Despite a slight increase in oil production in the contend with ongoing structural challenges. Crude oil medium term, crude oil export revenues are anticipated production is expected to improve slightly and reverse to decline due to lower global prices and an increase in the sector’s negative growth trend since 2020. The crude sales in naira to domestic refineries, in addition production of domestic refined petroleum products by to NNPC’s pledged crude oil commitments. However, the new Dangote Petroleum Refinery is expected to push rising non-oil exports, helped by a more competitive up oil refining output in the medium term. naira, are expected to partially offset the decline in oil exports. On the import side, refined oil imports are Inflation will moderate in the base case. Headline expected to decrease with new domestic fuel refining inflation is anticipated to peak at an average annual and the phase out of the gasoline subsidy, while non-oil rate of 31.7 percent in 2024, largely driven by the imports are likely to remain constrained. Remittances are depreciation of the naira and increased gasoline prices, also expected to strengthen, driven by the unification of both of which have exerted upward pressure on prices the FX rate. in the short term. Yet, in the medium term, recent macroeconomic reforms and their continuation will help Nigeria continues to face economic challenges and to reduce inflation, expected to fall to 14.3 percent by there are substantial downside risks to the outlook. 2027. The population faces a prolonged rise in the cost of living driven by high inflation, especially for food The fiscal position is expected to improve if the products, outpacing nominal earnings growth. Adverse Government remains committed to reforms to increase weather conditions may further limit agricultural domestic revenues, control expenditures, and avoid output, increasing food prices and exacerbating any recourse to financing through Ways and Means poverty, particularly for low-income households. It is Advances. Non-oil revenues are projected to continue thus essential to ensure that social protection systems rising, averaging 5.2 percent of GDP in 2025-2027, offer comprehensive coverage, adequate benefits, driven by higher dividends from parastatals and fiscal and flexibility to adapt to shocks. Ramping up social PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 21 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 protection efforts and improving the quality of spending extremely low by international standards. Similarly, on development priorities is vital to help households oil revenues need to be safeguarded by permanently cope with the difficult economic situation. On the fiscal establishing market-reflective gasoline prices. In terms front, setbacks to further increasing non-oil revenues and of meetings fiscal financing needs, the authorities are safeguarding oil revenues could increase debt pressures. strongly committed to no longer monetizing the fiscal Not resorting to monetizing the deficit is crucial deficit through Ways & Means Advances; it is critical to efforts to rebuild confidence in the naira, reduce to rebuild confidence in the naira and reduce inflation inflation, reduce debt costs, and keep the needed fiscal expectations that this continues. consolidation on track. The oil sector remains hindered by insecurity, limited investment, lack of transparency, The macroeconomic reforms, if sustained and and governance challenges. expanded, create a new platform to ignite growth and poverty reduction, also calling for deep structural 1.7. Policy priorities: Staying the reforms. Ongoing reforms boost international course on macro stabilization competitiveness, increase the attractiveness of Nigeria reforms, while intensifying for domestic and foreign investments, and have started support for the poorest to reduce debt-related fiscal risks and reopen fiscal space. households and expanding Yet, addressing longstanding and potentially binding opportunities constraints to growth are crucial for Nigeria to sustain stronger growth. This requires reducing trade barriers, Critical reforms are helping to stabilize Nigeria’s improving trade facilitation, increasing access to reliable economy, and need continued efforts. The CBN power supply, and improving the business environment. should stay the course with tight monetary policy and Transport infrastructure investments led by the private maintaining the unified, market-reflective exchange sector could integrate the domestic market, allowing rate policy. By building the relative appeal of the naira, businesses to reap economies of scale. Improving creative maintaining sufficiently positive real ex-ante policy rates destruction forces for productivity growth rely on not will help to drive down inflation. The monetary policy only lowering import barriers, but also improving toolkit should also progressively rely more on standard competition policy and its enforcement. Reducing rates-based instruments to improve policy transmission, insecurity, from banditry to informal checkpoints building on the progress thus far to return to orthodox along trade corridors, is essential to increase production policy conducive to macroeconomic stability and long- across sectors such as agriculture and the oil sector. term financial sector development. The official FX Improving state capacity to deliver essential services to market should be deepened, and foreign reserves rebuilt, the population, especially in poorer regions, requires as liquidity and access to FX is much more important sustained investments and policy improvements, and than the nominal exchange rate. Substantial FX trade can be a main driver for Nigeria’s development. The volume still occurs outside of NAFEM, as with recent country urgently needs to improve its human capital to retail FX auctions and sales to bureaux de change. fully benefit from its growing and young population, as The CBN could improve transparency by regularly described further in Part 2. publishing gross and net reserves at given dates. The unification and development of the FX market, higher Although many structural reforms would involve foreign investment, and positive net trade balances can longer and sustained efforts, some quick wins are be leveraged to rebuild foreign reserves. On the fiscal readily available. Trade protectionism geared towards front, increasing non-oil revenues is a continuing, urgent import substitution has failed to produce results. priority. Despite their recent increase, these remain Instead, it constrains Nigerians’ access to higher 22 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA STAYING THE COURSE: Progress amid pressing challenges quality or cheaper goods, with direct adverse impacts 2022 NDU, using a heat map where dark red indicates on their purchasing power and national poverty levels a significant issue and dark green indicates the issue (5.8 increase in prices for banned products). High has been largely addressed. Part (II) highlights the key effective rates are also estimated to increase input costs immediate actions needed to deepen and sustain the of Nigerian firms by 13.7 percent on average, curb reforms. healthy competition in the domestic market, and lower productivity. Recent measures to temporarily remove Whilst Nigeria’s macroeconomic stabilization efforts tariffs on food products and launch the National Single and boosting growth are urgent, there is also a need Window are welcome steps. These could be furthered for strategies to create productive jobs and ensure that by permanently lowering import tariffs on food and growth translates into poverty reduction. Chapter 2 of smoothing trade at the border with a green lane fast this report therefore delves into labor market outcomes trade system for perishable and food products; lifting in Nigeria and outlines pathways to help the country import bans on food and cleaning products, apparel, and to create the more productive, higher-quality jobs, fertilizers; reducing tariff deviations from the ECOWAS which are essential for long-term, inclusive growth. It Common External Tariff on all products; and improving also details policies that could be deployed to help farm trade facilitation through better risk management and by and non-farm household enterprises access the inputs implementing post clearance audits to reduce costs and they need and expand the markets they serve. Such time of cargo at the port and at border. strategies offer a way to sustainably boost the economic opportunities and earnings of all Nigerians, including Part (I) of Table 1.2, below, summarizes the vast majority who do not have access to formal, macroeconomic reform progress since the December waged employment. PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA 23 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Table 1.2. Progress with Key Economic Reforms Since December 2022 (I), and What Policies Are Still Needed to Sustain and Deepen the Reforms (II) (I) REFORM PROGRESS HEATMAP (II) POLICIES NEEDED TO SUSTAIN AND DEEPEN KEY REFORMS THE REFORMS NDU NDU NDU NDU Dec-22 June-23 Dec-23 Oct-24 (A) MONETARY POLICY • Maintain positive real ex-ante policy rates. • Ensure policy rates place a floor under short-term Maintain tight monetary policy to lower market interest rates. inflation • Rely more on policy rates and standard instruments (MPR anchoring, via OMOs and SDF/SLF), rather than on prudential instruments (e.g., CRR). • Have realistic budgets to avoid unbudgeted financing Avoid resorting to deficit monetization, requirements. including continuing to avoid Ways & • Increase the timeliness and detail level of information Means Advances on the Ways & Means Advances balance and interest paid on it, and on the CBN’s overall balance sheet. Improve balance sheet transparency • Publish the 2023 audited financial statements. • Provide details on net FX reserves. (B) FISCAL POLICY Eliminate the PMS subsidy • Adopt a plan to fully achieve and maintain a cost- reflective PMS price. • Include any implicit PMS subsidy in the budget. Strengthen non-oil revenues • Reform the VAT regime and rationalize tax expenditures. • Improve tax administration by adopting an e-invoicing system and strengthening tax audits. Increase transparency of oil revenues • Improve the reporting of oil revenues to FAAC. • Conduct an audit to reconcile what is owed by the NNPC to the Federation, and vice versa. Phase out the FX subsidy • Ensure that all FX-related transactions occur at the market-determined exchange rate. Reduce the cost of governance • Cut wasteful expenditures that are not essential, such as purchase of vehicles, external training, etc. • Reduce the cost of collection of MDAs/GOEs. (C) FOREIGN EXCHANGE POLICY Maintain a unified, market-reflective • Communicate and implement a comprehensive, exchange rate systematic framework for CBN FX interventions to provide clarity to market participants as to when and how CBN may buy or sell FX. • Focus on transparently supporting market liquidity and price discovery. Concentrate FX transactions in the • Take measures to build liquidity in the NAFEM, official market including by easing remaining restrictions, and channeling oil-related inflows to the market. (D) TRADE POLICY Reduce trade restrictions that increase • Lift import bans. prices and poverty • Eliminate tariff deviations from ECOWAS CET. • Adopt and implement a compliance trade program. (E) PROVIDE URGENT RELIEF TO THE POPULATION Scale-up and provide relief to the • Accelerate the roll out of targeted cash transfers. population • Allocate savings from PMS subsidy removal to sustainably expand cash transfers and other well- targeted support. Legend Weak Semi-weak Average Semi-strong Strong 24 PART 1: RECENT ECONOMIC DEVELOPMENTS AND THE OUTLOOK FOR NIGERIA NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 PART 2 - Spotlight: Fostering productive jobs is vital to help Nigerians find pathways out of poverty 25 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 2.1.Sustainable poverty reduction growth is not reaching poor and economically insecure relies on creating productive jobs Nigerians. Around 90 percent of Nigeria’s exports are in oil, an industry where job creation is limited (OEC, With growth proving too slow to outpace inflation, 2024). Total factor productivity has also been in decline, poverty has risen sharply. Since 2018, the share of while non-oil economic activity has shifted from low- Nigerians living below the national poverty line16 is productivity agriculture to low-productivity services – estimated to have risen sharply from 40.1 percent to this links with the shift in employment from agriculture 56.0 percent (Figure 2.1 A). Combined with population to services described below (World Bank, 2022). Foreign growth, this means that some 129 million Nigerians direct investment, which can help drive job-creating are living in poverty. This stark increase partly reflects innovation and overall investment, also remains low Nigeria’s beleaguered growth record. Real GDP per relative to the size of Nigeria’s economy and comparator capita has not recovered to the level it was at prior to countries (World Bank, 2023). the oil price-induced recession in 2016. The COVID-19 pandemic compounded this drop in economic activity. Ensuring that economic growth reaches poor and Moreover, growth is failing to outpace inflation: economically insecure Nigerians hinges on improving large increases in prices across almost all goods have labor market outcomes. The labor market is the main diminished purchasing power. vehicle through which the proceeds of economic growth are shared among households and individuals; the The structure of growth has not been conducive to labor market is a key determinant of job creation and poverty reduction; exports remain dependent on entrepreneurship. Labor – that is, time and effort – is oil, total factor productivity has declined, and non- the only asset for many poor and economically insecure oil economic activity shifted from low-productivity Nigerians (Fields, 2019). This means labor market agriculture to low-productivity services. Even when the policies that can support the creation of productive economy was growing rapidly in the early 2010s, richer private sector jobs are essential for lifting Nigerians out Nigerians benefited more than poorer Nigerians (Lain & of poverty. Vishwanath, 2022). Macroeconomic data hint at why 16 The national poverty line is 137,430 naira per person per year in 2018/19 prices, which corresponds to 2.48 USD 2017 PPP per person per day. It is therefore slightly higher than the international extreme poverty line of 2.15 USD 2017 PPP per person per day. Figure 2.1. Nigeria has experienced rising poverty, reflecting a decade of weak growth and rising inflation Panel B: Real GDP growth and real GDP growth per capita Panel A: Share of people living below the national 20 poverty line (Percent) 15 70 60 10 50 5 40 0 30 -5 20 10 -10 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 2018 2019 2020 2021 2022 2023 2024 Real GDP growth Real GDP per capita growth Notes: In Panel A, poverty estimates are constructed using the POVMOD projection model used for the World Bank’s Macro-Poverty Outlooks. Headline projections are created using a pass-through from GDP growth to household consumption growth of 0.9. Fan chart shows “bands” of predictions with pass-throughs of 0.8, 0.85, 0.9, 0.95, and 1. Sources: 2018/19 NLSS, WDIs, and World Bank estimates. 26 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges The time for poverty-reducing labor market policies than 12 million. The high number of working-age is now: Nigeria’s young and growing population people relative to those who are too young or old to provides the country with huge economic potential. work can give Nigeria a sizable “demographic dividend”. Almost two-thirds of Nigerians are aged less than 25 It can drive inclusive growth and poverty reduction (Fox (Figure 2.2). Millions of Nigerians will therefore soon & Gandhi, 2021). Harnessing the potential for such a come of working age. In the next 10 years, the number demographic dividend requires urgent action to invest in of 15-24 year-old Nigerians is set to increase by more human capital and create higher productivity jobs. Figure 2.2. Nigeria has a young and growing population, providing the country with a sizeable potential demographic dividend 90+ 80-84 70-74 60-64 Age (years) 50-54 40-44 30-34 20-24 10-14 0-4 25 20 15 10 5 0 5 10 15 20 25 Millions of people Female 2024 Female 2034 Male 2024 Male 2034 Sources: United Nations and World Bank estimates. The lack of productive jobs not only constrains productive livelihood opportunities are lacking (Cramer, inclusive growth and poverty reduction; it also 2010). risks squandering the potential of young Nigerians’ ambitions and could fuel conflict. Most young Against this backdrop, this spotlight reviews the Nigerians aspire to work in professions such as latest trends in Nigeria’s labor market outcomes and accountancy, the civil service, medicine, engineering, and considers broad policy directions that could improve teaching (Lain, et al., 2021). They are also optimistic, the country’s prospects for creating productive with around 8 in 10 15-25 year-olds believing that it jobs. The spotlight uses the latest microdata from the is likely or very likely that they will one day attain the Nigeria Labour Force Survey (NLFS) and 2018/19 dream job to which they aspire. Failing to harness these Nigerian Living Standards Survey (NLSS) to provide a ambitions and this optimism represents a waste of young comprehensive picture of the types of jobs that can lift Nigerians’ potential. Worse still, it could drive frustration Nigerians out of poverty and the policies that can help and even conflict. Evidence from across Sub-Saharan create them. Africa suggests that people – especially young people – are at higher risk of being drawn into conflict when PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 27 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 2.2. Employment alone is not working-age Nigerians are working, meaning they enough to lift Nigerians out of engage either in paid employment or subsistence poverty agriculture, regardless of whether they are in the richest or the poorest consumption decile (Figure 2.4)19. Most working-age Nigerians are employed, but many Moreover, unemployment is, if anything, higher among of them remain poor. Around 75.8 percent of working- Nigerians from richer households. Work therefore age Nigerians are employed, meaning that they work offers no guarantee of exiting poverty. In the absence of for pay or profit (Figure 2.3)17. Similarly, Nigeria’s widespread social security, households must engage in unemployment rate – the share of those in the labor force some sort of activities to provide them with the income, who are not employed but who are actively searching or directly with food, needed to survive. Only people for and are available for employment – is relatively low from richer households can afford to remain openly at just 4.7 percent. Being employed, however, is no unemployed for long spells while searching for a job. guarantee of being able to escape poverty. Many jobs are not productive and therefore remunerative enough The key question for Nigeria’s labor market is to afford a life beyond poverty18. This mix of high therefore not so much whether someone works, but employment and high poverty is not unique to Nigeria: what they do. Characterizing the productive livelihoods a similar situation persists in other countries in Western that can lift people out of poverty relies on examining and Central Africa and in peer countries in other regions detailed information on the types of jobs people do, the (Figure 2.3). occupations and activities in which they engage, and the nature of the establishments in which they work. There is relatively little difference in the likelihood It is this detailed profile of people’s jobs to which the that Nigerians from richer and those from poorer subsequent sections turn. households are working. Around two-thirds of 17 For the NLFS, the working-age population is defined as those aged 15 years or more. 18 Around 12.5 percent of employed Nigerians are also underemployed, in the sense that they work less than 40 hours per week and are willing and able to work more. 19 The estimated share of people who are working in the 2018/19 NLSS is lower than the estimated share of people who are employed in the NLFS. This may reflect the surveys’ different questionnaires and data-collection methods. The analysis in this spotlight focuses on the NLFS, as its approach was specifically designed to gather the most accurate labor market data. In particular, the NLFS was designed to reduce proxy responses, whereby one household member provides responses on behalf of another. Proxy responses can lead to lower estimates for the share of people who are working or employed, because household members may not know about one another’s labor market activities. Figure 2.3. High employment-to-population ratios, low unemployment, and high poverty often coexist Panel A: Poverty rate and employment-to-population ratio Panel B: Poverty rate and unemployment rate Nigeria Nigeria Benin Benin Cameroon Cameroon Neighbors Neighbors Chad Chad Ghana Ghana Niger Niger Bangladesh Bangladesh comparators comparators Other Other Ethiopia Ethiopia Kenya Kenya 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 Poverty rate Employment rate Poverty rate Unemployment rate Notes: Poverty rates reported using each country’s national poverty line. Employment-to-population ratios and unemployment rates taken from national sources. Sources: NBS, Poverty and Inequality Platform, ILOSTAT, and World Bank estimates. 28 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges Figure 2.4. Work offers no guarantee of escaping poverty 100 7 Share of the working-age population 90 Unemployment rate (percent) 6 80 70 5 60 4 (percent) 50 3 40 30 2 20 1 10 0 0 1 2 3 4 5 6 7 8 9 10 Decile of the real consumption distribution Working (LHS) Unemployed (LHS) Out of the labor force (LHS) Unemployment rate (RHS) Notes. The share who are working does not distinguish paid employment from unpaid activities like subsistence farming, as the questions in the 2018/19 NLSS were slightly different from the NLFS. Sources: 2018/19 NLSS and World Bank estimates. 2.3. Very few jobs allow workers with the small remainder primarily engaged in helping a to exit poverty household business or helping a household member who works for someone else. Wage jobs allow workers to escape poverty. Among employed people, the share of those who hold wage jobs Wage jobs also lack the non-pecuniary benefits that is around double for those from households in the top are often associated with job formality in high-income 60 percent of the consumption distribution compared to countries. Only around half of wage workers hold those in the bottom 40 percent (Figure 2.5). This could written contracts with their employer. The shares of wage reflect the fact that obtaining a wage job helps boost employed Nigerians with employers paying into social household income, but also, those coming from richer security, with annual leave, and with sick leave are just households have higher levels of education and human 28.0 percent, 22.6 percent, 20.0 percent respectively. capital, which may help them obtain a wage job in the first place. Either way, wage jobs are at least associated Wage-employment is highly segmented, with certain with exiting poverty. types of well-paying wage jobs being concentrated in the public sector. On average, public sector wage Yet wage jobs are extremely scarce, and even those jobs pay 66.2 percent more than private sector (or with higher levels of education have no guarantee of other) wage jobs (Figure 2.7). However, higher-skilled obtaining one. Only around 13.6 percent of employed individuals sort disproportionately into the public Nigerians primarily engage in wage jobs (Figure 2.6). sector. Overall, around one-third of wage workers hold Higher education increases the likelihood of holding public-sector jobs, but this share rises to around one- a wage job, but even among those with post-secondary half among those with post-secondary education. As education, more than half of employed people hold self- such, considering individual characteristics, such as employment jobs. Among self-employment jobs, 9 in 10 age, sex, and education, reduces the estimated wage involve working in one’s own farm or non-farm business, premium for public-sector workers to about 36.5 percent PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 29 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 (Annex 1). Yet the fact that a large earnings premium public sector jobs, which could lock out the poor and remains even after accounting for these characteristics economically insecure. Moreover, public sector workers suggests that there may be unfair barriers to entry to may have stronger bargaining power due to (1) collective Figure 2.5. Wage jobs are associated with exiting poverty 40 Share of working people primarily 35 engaged in wage jobs (percent) 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 Decile of the real consumption distribution Notes: Sample restricted to employed people aged 15+. Wage employment includes apprentices, in line with ILO guidelines. Sources: 2018/19 NLSS and World Bank estimates. Figure 2.6. Few employed Nigerians hold wage jobs, and even those with higher levels of education have no guarantees of finding wage work 100 Share of employed people (percent) 90 80 70 55.5 60 83.6 86.8 86.4 96.5 92.4 50 40 30 20 44.5 10 16.4 13.2 13.6 3.5 7.6 0 None or less Prima ry Junior Senior Post than primary secondary secondary secondary Educational attainment All Wa ge-employed Self-employed Notes: Sample restricted to employed people aged 15+. Primary job is the job that the individual spends the most time doing. Wage employment includes apprentices, in line with ILO guidelines. Sources: NLFS and World Bank estimates. 30 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges Figure 2.7. Wage jobs in the public sector and in large establishments have the highest earnings Panel A: Public and private sector Panel B: Establishment size 0.50 0.50 0.45 0.45 0.40 0.40 0.35 0.35 0.30 0.30 Density Density 0.25 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 6 8 10 12 14 16 6 8 10 12 14 16 Log of monthly wages Log of monthly wages 1-19 workers 20+ workers All Private or other Public Notes: Sample restricted to wage-employed people aged 15+. Sources: 2018/19 NLSS and World Bank estimates. bargaining arrangements, (2) their involvement in and increase earnings. More than 8 in 10 non-farm providing key services whose disruption is politically enterprises only employ labor from inside the household. sensitive, and (3) their direct proximity to policymakers Employing people from outside the household is (Abdallah, C; Coady, D; Jirsavetakul, F, 2023). therefore rare. Constraints on enterprise growth could also limit both the number and the productivity of wage Additionally, wage workers in larger establishments jobs. Firm survival and firm growth are challenges that have significantly higher earnings, as larger firms are start with the very smallest household enterprises. more productive. Wage-employed Nigerians working in establishments with 20 or more people have 71.0 percent While more education helps Nigerians gain high- higher earnings than those working in establishments skilled jobs, these jobs are relatively rare even for with fewer than 20 people. This difference drops to those with secondary or post-secondary education. around 40.9 percent – still a large premium – when Just 8.7 percent of employed Nigerians hold high- taking individual characteristics into account (see skilled jobs: these are the jobs that use skills associated Annex 1). Yet most wage jobs in Nigeria are not in with secondary education and beyond (Figure 2.8). large establishments and such jobs are especially hard to Even among employed Nigerians with post-secondary obtain for those with lower education levels: among wage education, the majority do not hold high-skilled jobs. workers, around 21.5 percent of those with primary For Nigerians with secondary education, only 7.2 percent education (or lower) work in establishments with 20 workers hold high-skilled jobs. While a mismatch of or more people, but this rises to 35.8 percent of those skills or opportunities can contribute to the difficulty of with secondary education and 60.1 percent of those with obtaining high-skilled jobs, an insufficient number of post-secondary education20. such jobs clearly contributes to it as well. Non-farm household enterprises are typically very small and struggle to grow, as self-employed Nigerians face constraints in trying to expand their productivity 20 As evidence from across Western and Central Africa shows, the scarcity of jobs in large establishments in not unique to Nigeria. For example, Davies and Kerr (2018) document the challenges that firms face in surviving and growing in Ghana. PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 31 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 2.8. While more education helps Nigerians obtain jobs that use high skills, such jobs are rare even for those with secondary and post-secondary education 100 90 80 Share of employed people (percent) 70 60 50 45.7 40 30 20 8.7 10 7.2 1.3 2.4 2.3 0 None or less than primary Primary Junior secondary Senior secondary Post secondary Educational attainment All Managers Professionals Technicians and associate professionals Cleri cal support w orkers Services and sales w orkers Skilled agricultural, forestry, and fisheries w orkers Craft and rel ated trades w orkers Plant and machine operators and assemblers Elementary occupations Armed forces All high-sk illed jobs Notes: Sample restricted to people aged 15+ who are employed and who report their occupation. Primary job is the job that the individual spends the most time doing. Managers, professionals, technicians and associate professionals, and clerical support workers are the only occupations that guarantee using skill levels 2, 3, and 4, which are the skill levels associated with secondary education or higher. Skill levels not possible to assign for services and sales workers, skilled agricultural, forestry, and fisheries workers, craft and related trades workers, and plant and machine operators and assemblers. See annex for further details. Sources: NLFS and World Bank estimates. Figure 2.9. Employment in Nigeria has shifted from agriculture to services in the last two decades, a sector in which productivity is higher overall… 100 90 Labor productivity (thousands, constant 2015 USD) 20 80 Share of employment (percent) 70 15 60 50 10 40 30 5 20 10 0 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Share of employment (percent) Agriculture Industry Services Agriculture Industry Services Sources: WDIs and World Bank estimates. 32 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges 2.4 Nigeria’s labor market is engaged in agriculture dropped from about half in 2000 changing as work shifts from to just over a third by 2021 (Figure 2.9). Services now agriculture to services, but this comprise more than half of Nigeria’s jobs. This echoes is not raising productivity and the overall shifts in economic activity from agriculture to earnings services. Notwithstanding the persistent low quality of jobs in Even with the influx of workers, services are more Nigeria, the labor market is in flux, with employment productive than agriculture, but the shift towards shifting dramatically from agriculture to services in services has not increased living standards; this is the last two decades. The share of Nigerian workers partly because some of the specific types of service- Figure 2.10. … but many of Nigeria’s new service-sector jobs are in sub-sectors with lower productivity, including retail and wholesale trade Panel A: Labor productivity by sub-sector Panel B: Detailed employment sector trends 100 Business and finance 90 Share of working people (percent) Transport / ICT 80 70 Utilities 60 Construction 50 Ser vices Manufacturing 40 Industr y 30 Commerce / hospitality Agriculture 20 Agriculture 10 0 Other services 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2023 Q1 0 1000 2000 3000 4000 Labor productivity Agriculture Industry Retail and wholesale trade Other services Notes: Panel A estimates adapted from Nigeria Country Economic Memorandum 2022. Commerce/hospitality includes retail and wholesale trade. Mining and extractives are excluded to improve readability. ICT = Information and Communication technology. Sources: ILO, NBS (for Panel A), NBS 2017 Q3 Unemployment Report, 2018/19 NLSS, and 2023 Q3 NLFS (onwards) (for Panel B), and World Bank estimates. sector jobs to which Nigerians are moving have are not guaranteed for all workers and could explain relatively low productivity, especially those in retail why there has been no accompanying increase in living and wholesale trade. Labor productivity remains more standards. than two-thirds higher in services than in agriculture in Nigeria, even though the increased labor supply 2.5. Accessing productive jobs is to the sector would be expected to exert downward even harder for Nigeria’s women pressure on earnings. Yet Nigeria’s service sector is highly and young people heterogeneous. Some sub-sectors within services have labor productivity levels that are close to, or even less, Unequal labor market opportunities for women than agriculture. Among these is commerce/hospitality, and men constrain inclusive growth and poverty which includes retail and wholesale trade jobs (Figure reduction. Lower labor market engagement from 2.10). Many of Nigeria’s new service-sector jobs are in women may cause Nigeria to miss out on a large part of retail and wholesale trade. This means the productivity its demographic dividend and misallocate its resources. gains of employment shifting from agriculture to services Barriers to entry into the labor market or into certain PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 33 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 2.11. Gender differences persist in terms of employment and job quality Panel A: Employment status Panel B: Underemployment 100 18 Share of the working-age population Share of employed people who are 90 16 80 underemployed (percent) 14 70 60 12 50 (percent) 10 40 8 30 20 6 10 4 0 2 Women Men 0 Employed Unemployed Out of the labor force Women Men Panel C: Wage jobs Panel D: High-skilled jobs 18 12 16 Share of employed people Share of employed people (percent) 14 10 12 (percent) 8 10 8 6 6 4 4 2 2 0 Women Men 0 Women Notes: Primary job is the job that the individual spends the most time doing. For Panel C, underemployment means the shareMenof employed people who work less than 40 hours per week, but who are willing and able to work more. For Panel D, managers, professionals, technicians and associate professionals, and clerical support workers are the only occupations that guarantee using skill levels 2, 3, and 4, which are the skill levels associated with secondary education or higher. Skill levels not possible to assign for services and sales workers, skilled agricultural, forestry, and fisheries workers, craft and related trades workers, and plant and machine operators and assemblers. Sources: NLFS and World Bank estimates. jobs prevent women from engaging in those activities that are less likely to lift them out of poverty. In which best match their skills and which would fully particular, employed Nigerian women are more likely to harness their productive potential (Cuberes & Teignier, be underemployed than employed Nigerian men, in the 2016; Georgieva, Sayeh, & Sahay, 2022). Removing such sense that they work less than 40 hours per week, but are labor market barriers to women today can also promote willing and able to work more (Figure 2.11). Moreover, further investment in human capital, shaping the they are less likely to hold wage jobs and jobs that utilize outcomes of future generations (Muller & Casabonne, higher skill levels. 2020). A sizeable share of women’s jobs is in retail and Women are less likely to be employed than men in wholesale trade and other services. The share Nigeria, and those that are employed work in jobs of employed Nigerian women working in retail 34 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges Figure 2.12. Employed women disproportionately engage in retail and wholesale trade activities 100 90 Share of employed people (percent) 80 70 60 50 40 30 20 10 0 Women Men Agriculture Industry Retail and wholesale trade Other services Sources: NLFS and World Bank estimates. and wholesale trade is around double the share of This underlines the additional constraints women face in employed Nigerian men (Figure 2.12). Women are accessing higher paying jobs. therefore disproportionately engaged in a sector where employment has been growing, but without gains in Young people have more difficulties accessing higher- productivity and earnings. This implies that policies skill jobs; this warrants special attention given the are needed to either improve productivity in retail and investments made in their human capital. The share wholesale trade jobs or to help open up jobs to women in of Nigerians who have attained primary, secondary, or other sub-sectors with higher productivity. post-secondary education is 7.8 percentage points higher among those aged less than 30 years compared to those Women’s labor market outcomes are associated with aged 30 or more (World Bank, 2024). The literacy rate family formation and gender norms, especially in is also significantly higher for younger Nigerians. This Nigeria’s northern states. The employment gap between suggests that the average skill levels of new labor market working-age women and men is strongly associated with entrants may be improving. However, most young people marriage, a proxy for family formation (Figure 2.13). are not currently finding jobs that harness their higher Family formation is also significantly associated with educational attainment. Young people are less likely a larger gender gap in the number of hours worked. to be employed than the non-youth overall, although Once caring for children and household chores are this mainly reflects the fact that many of them are still taken into account women in both the north and the in full-time education (Figure 2.16). However, those south of Nigeria work more hours than men, revealing young people that do gain jobs are more likely to be how unpaid care work constrains women’s available underemployed and they are much more likely to work time in the labor market (Figure 2.14)21. In northern in jobs that do not use higher skill levels. This directly Nigeria, overall employment as well as hours worked are limits the returns to the time and resources spent on correlated with proxies for local restrictive gender norms. their education. 21 This finding emerges from a time-use module implemented in the post-planting visit of Nigeria’s 2018/19 General Household Survey. PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 35 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Figure 2.13. Family formation and restrictive gender norms worsen gender gaps in labor market engagement, especially in northern Nigeria Panel A: Gender gap in likelihood of being Panel B: Gender gap in hours worked among employed, by north/south and marital status the employed, by north/south and marital 35 status *** Predicted gender gap in employment 30 18 Predicted gender gap in hours worked per 16 *** 25 (percentage points) 14 20 12 10 ** 15 *** ** 8 *** 6 week 10 4 5 2 0 0 Never Married Divorced Widowed Never Ma rried Divorced Wid owed married ma rried North South North South Panel C: Effect of local gender norms on Panel D: Effect of local gender norms on employed women’s likelihood of being employed by women’s hours worked, by north/south north/south 45.0 Predicted probability of being employed 80.0 40.0 70.0 *** 35.0 71.1 72.6 Prediced hours per week 60.0 62.3 30.0 *** (percent) 50.0 54.8 25.0 40.0 20.0 30.0 15.0 20.0 10.0 10.0 Less More Less More Less More Less More 5.0 restrictive restrictive restrictive restrictive restrictive restrictive restrictive restrictive 0.0 0.0 North South North South Notes: Stars show statistical significance level for the gender gap: * p<0.10, ** p<0.05, *** p<0.01. In Panels A and B, never married is the reference category. In Panel C, the proxy for gender norms is the share of women in the LGA for whom it is a problem getting permission to go to the doctor. In Panel D, the proxy for gender norms is the share of households in the LGA in which only the husband decides over large purchases. Control variables included in the regressions include age, marital status, number of children under six years old, education level and, LGA-level norms (decision-making on large purchases, asking permission to go to the doctor). Sources: 2018/19 NLSS and World Bank estimates. 36 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges Figure 2.14. Women work more hours than men, once caring for children and household chores are considered 60 50 Hours per week 40 30 20 10 0 Employed, Employed, Not Not Employed, Employed, Not Not North South employed, employed, North South employed, employed, North South North South Women Men Employment Caring for children Other chores Sources: 2018/19 General Household Survey and World Bank estimates. Figure 2.15. Women are less likely to manage Nigeria’s firms, while male and female managers declare different constraints on hiring women Panel A: Share of firms for which Panel B: Differences in constraints the top manager is female on hiring women declared by 20 female and male managers 18 16 Few women have the skills Share of firms (percent) 14 Women would disrupt work… 12 Government regulations… 10 Women's family commitments 8 Few women appl y for… 6 4 0 10 20 30 40 50 2 Share of managers (percent) 0 North South Total Male manager Female manager Sources: 2014 Nigeria Enterprise Survey and World Bank estimates. PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 37 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 2.6. Short- and long-run strategies poverty. Yet they remain rare in Nigeria; urgent action is can help Nigeria’s labor market to needed to help create them. Wage job creation depends drive poverty reduction on growth, so the macro-fiscal reforms described in Part 1 provide critical foundations. Boosting market access, Productive job creation – the cornerstone of increasing openness to trade, and promoting a better sustainably reducing poverty – will depend on business environment, could help firms grow and increase fostering macro-fiscal stability, accelerating growth, their job-creation potential – this can help make sure and improving the environment for private sector growth is job-rich. To do this, Nigeria can better leverage development. Wage jobs, especially those in large its large internal market by reducing transport barriers, establishments, offer workers the best chance of escaping including through investing in new infrastructure and Figure 2.16. Many young Nigerians do not find the jobs that harness their human capital investments Panel A: Employment status Panel B: Underemployment 100 20 Share of the working-age population (percent) 90 18 80 Out of the labor Share of employed people who are 16 force - not in underemployed (percent) 70 education 14 60 Out of the labor 12 force - in education 50 10 Unemployed 40 8 30 6 Employed 20 4 10 2 0 0 Youth Non-youth Youth Non-youth Panel C: Wage jobs Panel D: High-skilled jobs 20 12 Share of employed people Share of employed people 10 15 8 (percent) (percent) 10 6 4 5 2 0 0 Youth Non-youth Youth Non-youth Notes: Youth means those aged 15-24 years. Non-youth means those aged 25+. Primary job is the job that the individual spends the most time doing. For Panel C, underemployment means the share of employed people who work less than 40 hours per week but who are willing and able to work more. For Panel D, managers, professionals, technicians and associate professionals, and clerical support workers are the only occupations that guarantee using skill levels 2, 3, and 4, which are the skill levels associated with secondary education or higher. Skill levels not possible to assign for services and sales workers, skilled agricultural, forestry, and fisheries workers, craft and related trades workers, and plant and machine operators and assemblers. Sources: NLFS and World Bank estimates. 38 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges eliminating informal trade costs. Basic infrastructure – in Nigeria for years or decades in the future (Fox & such as an uninterrupted electricity supply – constitutes Gandhi, 2021). Raising productivity in farm and a critical input for many firms. International trade is also non-farm enterprises could increase earnings for their essential for increasing the size of the market for export owners, lifting them out of poverty, as well as potentially goods and helping domestic firms to import inputs, allowing them to grow and employ others outside of while also imposing competitive discipline to drive up the household. While agriculture represents a declining productivity and earnings. Working towards competitive share of jobs in Nigeria, it remains a crucial income- neutrality – meaning that no firms should have undue generating activity for the poor and economically advantages from who owns or controls them – and insecure. Therefore, policies to promote farm fostering a more conducive business environment could productivity and commercialization – including new support better allocation of resources in the Nigerian and more climate-resilient crop varieties and investments economy and attract more foreign direct investment. in storage, transport, and market access – will be vital (Oseni & Winters, 2009; FAO, 2018; Beegle & On the labor supply side, Nigeria can hone the Christiaensen, 2019; Ecker & Hatzenbuehler, 2021). skills required for the productive jobs. Despite the Similarly, non-farm household enterprises would benefit significant investment in human capital, Nigeria still has from policies that make it easier to acquire key inputs a long way to go to equip workers with the skills they including through improved access to finance, build the need for productive jobs and to boost the skills needed to infrastructure on which small businesses rely, and foster establish, maintain, and grow firms. Given their health output market access. This echoes many of the reforms and education outcomes, a child born in Nigeria in 2020 to the business environment that help medium and large will only achieve 36 percent of the productivity he or firms create wage jobs. she could have attained with full health and education, meaning Nigeria had among the lowest human capital Policy initiatives that cover only highly-formalized levels in the world22. At the same time, many Nigerians wage jobs – including policies focused on public who have achieved higher levels of education are not sector workers and minimum wage legislation – may working in jobs utilizing commensurate skill levels. As not reach many of Nigeria’s poorest workers directly. sectoral shifts advance and other trends – including While increasing the demand for wage workers is a key digitalization – progress, tracking Nigeria’s changing policy priority, the vast majority of employed Nigerians skills needs will be vital. Given the depth of its new and – especially from poorer households – do not currently improved labor force survey, Nigeria could consider hold such jobs. This limits the direct effects that policies putting in place a formal skills monitoring system to focusing on subsets of wage workers can have on poverty. help guide policies around basic education, vocational In particular, public sector wage jobs are not only rare training, and migration23. and disproportionately occupied by comparatively better off Nigerians; they also pay significantly more than Short- and medium-run policies to boost productivity private sector and other types of wage jobs, even after in farm and non-farm household enterprises would taking individual characteristics into account, suggesting provide relief while higher-paying jobs are not there are additional barriers to entry into public sector available and could even support some to succeed jobs, which may lock out the poor and economically and grow. Even if the reforms outlined above eventually insecure. Similarly, minimum wage legislation may not help wage jobs proliferate, “informal will be normal” directly reach the poorest workers because they do not 22 This finding emerges from the 2020 Human Capital Index (HCI), which is based on a range of markers of health and education including infant mortality, expected years of schooling, sand stunting (World Bank, 2020). Only six countries had lower HCI scores than Nigeria globally in 2020. 23 The creation of a “Critical Occupations List” for Indonesia provides a helpful example of skills monitoring initiatives (World Bank, 2020). PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 39 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 hold wage jobs and around a third of private sector are more severe – including in care and related services. wage earners receive less than minimum wage anyway, Investing in skills development systems that strategically demonstrating that enforcement is imperfect. Raising cater to labor markets abroad and developing a strong minimum wages and public sector pay could also be migration system to manage regular migration presents fiscally costly. a major opportunity. Third, it is equally important to provide fallback or transitional opportunities – including Therefore, policy initiatives could focus directly on by ensuring that public investments consider job poor, economically insecure, and excluded workers, creation potential – for those young people that do not who would benefit from specific policies to improve have better employment opportunities. their labor market outcomes; this includes improving labor market opportunities for women. Gender- State-specific policy initiatives can provide sensitive policies have the potential to work towards opportunities to trial smaller and more manageable closing the gap between women’s and men’s labor market programs before nation-wide rollouts. Labor market outcomes. Such polices could focus on: (1) keeping outcomes are highly heterogeneous across Nigeria. For girls in school, which delays marriage and childbearing example, wage-employment is generally more common and hence helps increase scope for women’s economic in the country’s southern states, while a larger share of participation; (2) improving the provision of childcare; employed Nigerians primarily engage in agriculture in and (3) relaxing or overcoming restrictive gender norms the northern states (Figure 2.17). Hence, specific policies that limit women’s labor market participation through and the way they are targeted could be approached economic empowerment interventions combined differently across states. Given the scale of Nigeria’s labor with couples’ trainings or community sensitization, or market challenges, working at the state level may also correcting misperceptions around women’s labor market provide an opportunity to try out initiatives before they participation. are implemented across the country. All of Nigeria’s labor market challenges cannot be addressed instantaneously, Likewise, finding employment solutions that cater to but breaking the problem down into more “bitesize” Nigeria’s large and growing youth population is an pieces could offer policymakers a springboard to try, urgent policy priority; this means (1) supporting skills evaluate, and potentially scale up interventions. and job matching, (2) managing external migration, and (3) providing fallback employment. First, skills Given the wide range of policies that can bolster programs need to be better linked with labor demand Nigeria’s labor market outcomes, continued and supported by an efficient job matching system. In investment in the country’s labor market data will the current context where job opportunities are scarce, remain essential. The policy insights in this spotlight it is critical to ensure that the right people are matched – which are summarized in Table 2.1Table 2.1 – rely for the right kind of jobs, and that the youth invest in on Nigeria’s new and improved labor force survey, the those skills that will provide an economic return. The NLFS, which was relaunched with a methodology that increasing global (and domestic) demand for digital skills matches international best practices at the end of 2022. can be one such area. Second, Nigeria needs to invest in Maintaining this momentum on data collection will be facilitating migration and developing managed migration crucial for making sure new policies are informed by systems. While Nigeria’s demographics are youthful, evidence and give the poorest Nigerians the labor market many developed economies are rapidly aging and need opportunities they need to escape poverty. workers. Nigeria can capitalize on this by proactively facilitating migration to those destinations, especially in occupations where skills shortages in aging economies 40 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges Figure 2.17. Nigeria’s labor market outcomes differ widely across the country’s states Panel B: Share of employed Nigerians engaged primarily in Panel A: Share of employed Nigerians holding wage jobs (percent) agriculture (percent) Notes: Sample restricted to employed people aged 15+. Sources: NLFS and World Bank estimates. PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY 41 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Table 2.1 Summary of policies to help create productive jobs for poverty reduction Strategies to create productive wage jobs and build the right skills • Maintain momentum on reforms to foster macro-fiscal stability and accelerate growth (see Part 1) • Leverage Nigeria's large internal market by investing in infrastructure and eliminating informal trade costs • Reinforce provision of the basic infrastructure needed by firms to survive and grow, including uninterrupted electricity • Reduce barriers to international trade to promote exports • Work towards competitive neutrality, meaning that no firms should have undue advantages from who owns or controls them • Foster a more conducive business environment • Continue investing in human capital • Track the economy's skills needs, as sectoral shifts and other trends - including digitalization - progress Solutions to boost productivity in farm and non-farm household enterprises For farms: • Promote more climate-resilient crop varieties • Invest in storage and transportation • Support access to output markets For non-farm household enterprises: • Ensure enterprises can access key inputs, including through better access to finance • Bolster basic infrastructure • (As with farms) support access to output markets Tailored policies for poor, economically insecure, and excluded workers, including women and young people For women: • Help girls stay in school • Improve provision of childcare • Overcome restrictive gender norms through economic empowerment interventions and trainings/community sensitization For young people: • Support skills development and job matching • Manage external migration, including by helping young emigrants reach destination countries that need their skills • Provide fallback employment – including by ensuring that public investments consider job creation potential – to help improve access to productive jobs Trial interventions at the state level before scaling up Plus: keep investing in labor market data to track progress and hone policies Sources: World Bank. 42 PART 2: SPOTLIGHT: FOSTERING PRODUCTIVE JOBS IS VITAL TO HELP NIGERIANS FIND PATHWAYS OUT OF POVERTY STAYING THE COURSE: Progress amid pressing challenges References Fox, L., & Gandhi, D. (2021). Youth employment in sub-Saharan Africa: Progress and prospects. Washington DC: Brookings. Retrieved from https://www.brookings. Abdallah, C; Coady, D; Jirsavetakul, F. (2023). Public- edu/articles/youth-employment-in-sub-saharan-africa- Private Wage Differentials and Interactions Across progress-and-prospects/ Countries and Time. Washington DC: International Monetary Fund. Retrieved from https://www.imf.org/ Georgieva, K., Sayeh, A., & Sahay, R. (2022). How to en/Publications/WP/Issues/2023/03/17/Public-Private- Close Gender Gaps and Grow the Economy. Washington Wage-Differentials-and-Interactions-Across-Countries- DC: International Monetary Fund. Retrieved from and-Time-531080 https://www.imf.org/en/Blogs/Articles/2022/09/08/ how-to-close-gender-gaps-and-grow-the-global-economy Beegle, K., & Christiaensen, L. (2019). Accelerating Poverty Reduction in Africa. Washington DC: World Lain, J., & Vishwanath, T. (2022). 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Retrieved from https://documents. worldbank.org/en/publication/documents- reports/documentdetail/099020012132216124/ p1761970c336260ce0bd0e0ebd98a53275d 44 STAYING THE COURSE: Progress amid pressing challenges Annex 1. Earnings regressions among the wage employed Regression of earnings on establishment and individual characteristics among wage- employed workers Public sector Establishment size Public sector and establishment size No controls With controls No controls With controls No controls With controls Public sector 0.6623*** 0.3648*** 0.3823*** 0.2144*** (0.0309) (0.0303) (0.0364) (0.0362) Establishment 0.7098*** 0.4087*** 0.5243*** 0.3302*** size of 20+ (0.0309) (0.0249) (0.0350) (0.0291) Controls? N Y N Y N Y N 5765 5765 5559 5559 5559 5559 R-squared 0.1158 0.3617 0.1475 0.3745 0.1759 0.3817 Notes: Sample restricted to wage-employed people aged 15+. Dependent variable is log of earnings in the primary job. The top 1 percent of log earnings are winsorized to reduce the influence of outliers, but this does not substantially alter the results. Standard errors are clustered at the enumeration area level and are in parentheses. Some respondents did not know the size of their establishment, which explains the lower sample size in those regressions. * p<0.10, ** p<0.05, *** p<0.01. Sources: 2018/19 NLSS and World Bank estimates. 45 NIGERIA DEVELOPMENT UPDATE | OCTOBER 2024 Annex 2. Nigeria - Key Economic Indicators 2020 2021 2022 2023 2024f 2025f 2026f 2027f Real economy GDP (current LCU, billions) 154,252 176,076 202,365 234,426 286,733 341,346 395,047 447,527 GDP per capita, PPP (constant 2021) 5,558 5,624 5,670 5,695 .. .. .. .. Real GDP per capita (change, percent) -4.4 1.0 0.7 0.3 0.7 0.9 1.1 1.2 Real GDP (change, percent) -1.8 3.6 3.3 2.9 3.3 3.5 3.7 3.8 Agriculture 2.2 2.1 1.9 1.1 1.5 1.9 2.2 2.4 Industries -5.8 -0.5 -4.6 0.7 0.9 2.5 2.7 3.1 Industry - oil -8.9 -8.3 -19.2 -2.2 1.0 5.6 5.2 3.8 Industry - non-oil -3.9 4.4 3.3 2.0 0.8 1.3 1.7 2.8 Services -2.2 5.6 6.7 4.2 4.9 4.4 4.5 4.5 Prices GDP deflator (percent) 7.8 10.1 11.3 12.6 18.4 15.0 11.6 9.1 CPI inflation (average, percent) 13.2 17.0 18.8 24.7 31.7 23.5 18.1 14.3 Oil price (Bonny light, US$/bbl) 42.0 65.5 104.6 85.2 85.8 79.8 76.7 73.6 Exchange rate (average, N/$) 382.2 410.3 428.2 644.7 .. .. .. .. Selected monetary indicators Percent of GDP Broad money (percent; end of period) 24.5 25.2 25.6 33.6 .. .. .. .. Bank credit to private sector 19.4 19.8 20.6 26.7 .. .. .. .. Bank credit to the government 7.5 7.9 12.2 14.3 .. .. .. .. Fiscal accounts Percent of GDP Revenues 6.7 6.7 6.8 7.6 10.5 10.3 11.2 11.4 Expenditures 11.9 13.2 11.4 12.9 14.8 14.8 14.9 15.0 Primary fiscal balance -2.9 -3.9 -1.6 -1.8 -0.3 -0.6 -0.2 -0.2 Overall fiscal balance -5.2 -6.6 -4.6 -5.3 -4.3 -4.5 -3.7 -3.6 Public debt 36.1 38.8 40.3 49.1 51.1 49.9 48.6 48.4 External debt 8.2 9.9 9.3 16.3 26.1 25.4 25.8 26.1 Domestic debt 27.8 29.0 31.0 32.8 25.1 24.5 22.8 22.3 Balance of payments Percent of GDP, unless otherwise stated Current account balance -4.0 -0.8 0.7 1.7 4.5 3.6 3.0 2.8 Trade balance -8.0 -3.9 -1.7 -1.4 -1.7 -1.6 -1.5 -1.3 Exports of goods and services 9.9 11.8 14.6 16.6 30.3 26.3 23.2 21.3 Imports of goods and services -17.9 -15.7 -16.3 -18.0 -32.0 -27.9 -24.7 -22.5 Primary income -1.2 -2.0 -2.2 -3.0 -5.4 -4.5 -3.9 -3.4 Secondary income 5.2 5.1 4.6 6.1 11.6 9.7 8.3 7.4 Net foreign direct investment 0.2 1.2 -0.1 0.6 1.2 1.2 1.0 1.0 Net foreign portfolio investment -0.9 1.3 0.8 1.8 4.8 4.2 3.7 3.3 Gross reserves (million US$, eop) 35,492 41,181 37,194 32,912 .. .. .. .. Gross reserves (months of imports) 5.9 7.3 5.8 6.0 .. .. .. .. Sources: NBS, CBN, OAGF, DMO, and World Bank estimates 46 STAYING THE COURSE: Progress amid pressing challenges 47 Nigeria Development Update October 2024 View this report online: www.worldbank.org/en/country/nigeria The View by Jimmy Nwanne Jimmy Nwanne is a Nigerian artist who lives and works in Kaiserslautern, Germany. Born in Kaduna, Nigeria, he studied Fine Arts with painting as his major at Nnamdi Azikiwe University in Awka, Nigeria. Whether as portraiture or composition, Nwanne’s works look at the relationship between life, identity and migration. The freedom to make a composition, a portraiture, by rearranging the natural place of something into another, in order to communicate an idea is what is usually being explored. The piece simply touches on the story of success, someone finding love. People forge ideas, people mold dreams, and people create art. To connect local artists to a broader audience, the cover of this report and following editions will feature art from Nigeria.