Seye Kosoko and Olafimihan Olayinka of Standard
Chartered look at how Nigeria has achieved economic success in
the face of adversity.
Nigeria has dominated the headlines in recent months, and not
always for positive reasons. Boko Haram's atrocities have
claimed thousands of lives and shocked the world. But if the
jihadi threat has hampered investment into the country in a
significant way, it has yet to show.
Nigeria recently overtook South Africa as the continent's
largest economy. The UN listed it in 2013 as the 26th largest
economy in the world by nominal GDP and the World Bank and EY
both see encouraging signs for the country as a place to do
business. Seye Kosoko and Olafimihan Olayinka of Standard
Chartered explain how, despite the political instability that
has rocked the country, and Nigeria's continued reliance on oil
amid falling prices, there are plenty of reasons to be
How did Nigeria come to overtake South Africa as Africa's
With a GDP of $509.9 billion (NGN80.22 trillion) for 2013,
Nigeria has formally overtaken South Africa to become Africa's
largest economy. This was achieved as a result of the rebasing
of the country's gross domestic product in 2014 – an
exercise that hadn't taken place since 1990. The United Nations
Statistical Commission recommends a statistical rebasing every
five years, to account for inflation and changes in the
patterns of a country's economic activity –
consumption and production. By updating the base year from 1990
to 2010, the Nigerian economy had additionally made the
necessary adjustment for the significant expansion of the
services industry particularly the internet, telecommunications
and entertainment industries.
Before the rebasing, the estimated GDP for the country was
NGN42.3 trillion – nearly doubled by the rebased
figures. The number of economic activities surveyed for the
purposes of the calculation of GDP increased to NGN46 from
NGN33 previously. Better coverage, including of the informal
sector, the inclusion of new industries, and methodological
improvements also led to significant increases in the
contribution of the services sector, manufacturing,
construction, and water and electricity. The services sector's
contribution increased from 29% of GDP to 52%, with the
telecommunications sector rising from 0.9% to 8.7%. The
manufacturing sector is now estimated to contribute 6.8%,
compared to just 1.9% previously, while the oil and gas
sector's contribution has been revised down to 14.4% from 32.4%
The statistical data however also indicated that Nigeria's
economy was $453 billion in 2012, instead of $264 billion as
measured by the World Bank. In that year, South Africa's
economy was at $384 billion in 2012, according to the World
Bank. It therefore shows that Nigeria's economy in a real
sense, had since overtaken that of South Africa even though
this had not been reflected in the statistical figures.
With an improved ranking as 26th biggest economy in the
world (from 33rd before the rebasing) and a reduction of its
debt-to-GDP ratio to 11% for 2013, against 19% in 2012, the
Nigerian government anticipates significant interest and
increased foreign and domestic investment in the country, which
will potentially result in a positive impact on the Nigerian
economy and its people.
According to the country's Finance Minister Ngozi
Okonjo-Iweala, an investment of $1.5 billion was envisaged in
2015 in the agricultural industry alone. There are however
concerns among some analysts and Nigerians that though the
recalculated GDP may raise Nigeria's profile internationally,
the impact on the common Nigerian may not be commensurate
considering unresolved issues poor infrastructure, corruption
and insecurity, which the country currently faces.
How is the Nigerian economy coping with falling oil prices?
Has greater diversification shielded it from the downturn?
Nigeria's economy is still largely dependent on oil, with
over 90% of its foreign exchange earnings being derived from
oil sale proceeds. The annual budget, which defines the
direction of the country's economy, is based on crude oil price
that was benchmarked in the 2014 budget at $78. Against this
background, the falling price of oil – from $110 per
barrel in January 2015 gradually to about $53 per barrel
currently – therefore portends potential hard times
for the country.
In response to this unanticipated state of affairs, the
government immediately recognised the need to make adjustments
with tighter fiscal and monetary policies as well as the need
to build up economic buffers. In this light, the government has
revised the benchmark oil price in the 2015 budget to $52.
Other measures taken or are in the pipeline include reducing
the wastage of government funds through restrictions on foreign
travel by civil servants; replacement of foreign training
programmes with local trainings; and streamlining of the
functions of the ministries, departments and agencies (MDAs) to
eliminate duplication. Austerity measures have also been
introduced. There are also plans to increase the VAT rate from
10% to 15%, not only to raise revenue but also to align with
the VAT rates of other West African countries and make it
easier to implement the Common External Tariffs.
To what extent has recent political instability, in
particular the Boko Haram insurgency, hampered investment in
The state of insecurity in Nigeria heightened since the Boko
Haram insurgency, that started in 2009, but has since steadily
increased in severity and impact, leading to the loss of
thousands of lives and property worth millions of dollars.
Though the insurgency is linked to Islamic fanaticism, many
have also attributed its root causes to factors such as
political differences, economic inequalities, poor
infrastructure, poverty, unemployment, lack of education,
religious and ethnic distrust.
"Nigeria’s economy is still largely
dependent on oil, with over 90% of its foreign exchange
earnings being derived from oil sale proceeds"
The direct impact of the insurgency is most prominent in the
northern eastern part of Nigeria, where the insurgency has
remained prevalent. Amidst the risk of actual loss of life,
destruction of property/investments and a general atmosphere of
mistrust, fear and anxiety, the insurgency has led to massive
exodus of citizens and businesses from the affected areas,
while the few remaining businesses operate very skeletally.
Clearly, this has led to a significant economic downturn and
disinvestment in the North East – a state of affairs
could remain for quite a while, as re-building the destroyed
infrastructure and regaining investor confidence in the area
cannot be immediate. In any event, the insurgency is currently
Notwithstanding this impact on the north east, the country's
economy as a whole has not experienced a similar downturn as a
direct result of the insurgency, despite the kidnap of over 200
school girls in 2014 which generated massive media and
international attention. The Boko Haram violence does not
extend to Lagos or the Niger Delta region where the economic
activities and foreign investments are highest. As there is
minimal foreign investment in the north east where the
insurgency is prevalent, investors seem to have discounted the
security situation. Even in the commercial cities of the north
like Kano and Abuja where the insurgency surfaces from time to
time, this has not resulted in a significant decline of
investment in the country as a whole.
Some investors understand that political instability is not
a new development in Nigeria, as the country has experienced
religious, political and other crises at various times since
its independence. While the insurgency may therefore be a
source of concern to new investors, existing investors appear
to have taken the view that it will not likely affect their
businesses. GE, for example, has been in operation in Nigeria
for over 40 years, employs about 250 people and operates
offices in Lagos and Abuja, and still intends to invest about
$10 billion in new power plants.
Nigeria has leapt five places in this year's Doing Business
report from the World Bank. What is making Nigeria an
increasingly attractive place to do business?
To corroborate this position, Ernst & Young ranked
Nigeria third after South Africa and Kenya as the "most
attractive investment destinations in sub-Saharan Africa",
according to its recent Africa Attractiveness Report for 2014.
Nigeria has been a major destination for foreign direct
investments for a number of years now. In 2013, Nigeria
received more than $21 billion of foreign direct investment
being 28% higher than the year before.
Has pegging the naira to the dollar and devaluing it
Because the country's revenue is largely dependent on oil
exports, its currency is tied closely to the dollar. With the
decline in oil prices and depletion of the foreign reserves,
devaluation of the naira was inevitable, as has been considered
by many as the appropriate step under the circumstance.
Devaluation of a country's currency is generally known to
stimulate and encourage exports, because the prices of local
products serve as an incentive for foreign buyers, whilst also
discouraging importation for the same reason. However, because
Nigeria is an import-dependent nation with low production of
non-oil export commodities, increased cost of importation will
lead to the increased cost of goods in the nation.
The expectation is also that government's revenue, in terms
of naira value will increase, because of the wider exchange
rate disparity between the dollar and the local currency.
However, the effect of the continued fall in oil prices and
decline in crude production by the country will limit the
expected positive effect. Other happenings in the financial
services industry such as the recent increase in interest rates
on loans and adverse adjustment of the cash reserve ratio
requirements for banks by the CBN will also increase the cost
of lending and reduce liquidity in the country; thus limiting
the anticipated benefit of the devaluation.
The Nigerian financial sector appears to be expanding at
approximately twice the rate of GDP growth. What accounts for
the industry's boom?
Since the mandatory recapitalisation of Nigerian banks in
2006, Nigerian banks have had an increasingly robust capital
base with which to do businesses of larger volumes and
Expansion of Nigerian banks to other countries;
establishment of foreign banks in Nigeria; participation in
multi-jurisdictional transactions and general globalisation of
the financial activities have extended the scope and complexity
of transactions in which Nigerian banks are involved, hence
increasing their activities and returns.
Sanitisation of the industry by the CBN, closer monitoring,
supervision and surveillance has increased local and foreign
confidence in Nigerian banks.
Also, government policies on privatisation/PPPs on
infrastructure development, oil and gas, energy etc has
necessitated an increased involvement in banks for the
provision of funding.
Eurobond issuance is expected to continue out of Nigeria in
2015. What risks does this bring?
The dollar's advance versus the Nigerian currency over the
past nine months makes it costlier for Nigeria to pay interest
and principal with the naira. That's being exacerbated for
Nigeria, being an oil-producing country, which has seen dollar
revenues tumble amid the 52% drop in crude prices since last
year's peak in June. Nigeria's naira is the worst performer,
Yields on Nigeria's $500 million of Eurobonds due July 2023
have soared 199 basis points since the end of May, more than
similar-maturity Russian dollar debt according to data compiled
by Bloomberg. There is growing concern about the capacity to
pay the interest, not only the nominal amount. Investors are
going to become far more punishing of the sovereign for any
type of fundamental weaknesses.
The currency's woes have raised some fear about the impact
on the balance sheets of companies and banks and have been
reflected in some of Nigeria's top banks' Eurobonds. Nigerian
banks' total foreign currency exposure tallied up to as much as
$11 billion when adding syndicated loans and currency swaps to
the $3.6 billion total outstanding in Eurobonds. Inflationary
pressures from the devaluation are already taking its toll on
consumer disposable income and banks' retail loans. One thing
is for sure in 2015: abundant Nigerian Eurobond issuance is
unlikely to continue in the same volume as before. The recent
tighter restrictions on banks' foreign currency borrowing by
the CBN is an indicator.
How are minority shareholding rights shifting in Nigeria
and how will this affect the M&A market?
In Nigeria, protection of the minority shareholder has a
strong statutory backing and the corporate law spells out the
peculiar rights and remedies available to this group of
shareholders beyond the general rights of every shareholder.
This includes the right to information, right to voice an
opinion on the affairs of the company, right to seek redress
for wrongful acts of the majority and the right to receive
distribution of the company's property after liabilities have
been settled. Most of these rights are limited or could be
extended by the shareholders' agreement or other company
contracts like the articles of association.
Despite the protection provided for the minority
shareholder, there are certain factors that have hindered the
minority shareholders from exercising their rights in Nigeria.
One of these is lack of awareness or interest on the part of
the shareholders. A majority of shareholders are usually more
interested in the returns they can get for their investment
rather than how the company is being administered or whether or
not the company under goes a scheme of arrangement (merger or
acquisition). However, as there is a direct link between the
quality of administration of a company and the returns the
company makes for its shareholders, there is need for
shareholders, particularly the minority to be more actively
involved in the affairs of the company they have invested
Minority shareholders constitute a check on the excesses of
the majority in the administration of the company and they must
seek to enforce their rights and seek redress where such rights
have been infringed by the majority in order to get the best
value for their investment.
Provision for shareholders' safeguards in corporate
governance in Nigeria is articulated in two broad frameworks.
These are: provisions within the Company Law; and provisions
within the Securities and Exchange Commission Act. The need for
safeguards for the rights of shareholders in corporate
governance reveals two broad levels of protection. These are:
safeguards between the shareholders in general meeting and the
board of directors; and safeguards between the minority
shareholders and majority shareholders and the management (for
The SEC Code expressly provides that the company or the
board should not discourage shareholder activism whether by
institutional shareholders or by organised shareholders'
groups. The code envisages that the general meeting should be a
forum for shareholder participation in the governance of the
company. Regarding the composition of the board of directors,
the code provides that shareholders with less than 20% or more
shareholding should have a seat on the board. It further
provides that a director representing the interest of minority
shareholders should be given a seat on the board. The code
further provides for more regular briefings of shareholders,
going beyond the half year and yearly reports.
Head, legal and company secretary, Standard
T: +234 1 236 8365
Senior counsel, Standard Chartered
T: +234 1 2778006
Olayinka Olafimihan is a senior counsel in the legal
& compliance Africa team supporting corporates and
institutional clients of Standard Chartered Bank across
the African continent, with special focus on the West
Africa sub region. He is responsible for the delivery
of world class legal support to the CIC business in the
West Africa sub-region as part of the Africa region CIC
legal support team.
He is a highly experienced product specialist with
over 30 years post call experience in legal practice,
banking and telecommunications. His experience spans
diverse industry segments where he occupied many senior
positions and played diverse roles over the years
within his native Nigeria and the entire West Africa
A Fellow of the Chartered Institute of Secretaries
& Administrators (FCIS) (UK & Nigeria) he also
holds an MBA from the University of Ilorin Nigeria and
a Master of Laws (LL.M) degree from the London School
of Economics and Political Science (LSE) where he
specialised in Corporate Commercial and Taxation
He was a member of the Nigeria Communications
Commission (NCC) committee that developed the corporate
governance policy for the Nigerian telecommunications
industry. He is married with a daughter and two