As McKinsey and Company wrote in December 2020, irrespective of whether Nigeria’s banking system was quick to take actions in response to the COVID-19 crisis, Nigeria’s economy – which the United Nations refers to as the “fastest growing economy in the [African] region”, has undergone a series of difficult changes. The country entered a recession at the beginning of the COVID-19 crisis in 2020, “reversing three years of [economic] recovery”, as the African Development Bank (AfDB) stated back then. Thereafter, it was praised for unexpectedly exiting the latter in Q4 of 2021 witnessing a GDP growth of 0.11% from one year before. However, just after exiting its economic recession, Nigeria witnessed its inflation rate skyrocketing. Whereas the country’s inflation rate already rose to 15,8% in December 2020, it climbed to 18,17% in March 2021 from there only gradually decreasing to 15,4% in December 2021. This article will offer a few insights about Nigeria’s economy suggesting that Nigerians need better access to sustainable finance, which could to an extent be restored through fintech solutions.
Nigeria’s Economy Has to Become Inclusive
As mentioned above, Nigeria’s inflation rate has been skyrocketing during the COVID-19 pandemic, however it has also been falling from March 2021 to November 2021. With food prices having been particularly high from November 2020 to October 2021, the more recent growth of Nigeria’s real GDP (4,06% in Q3 2021) does not illustrate the struggles, which its citizens have actually been facing. An inflation rate of 15,4%, as Nairametrics reemphasizes, “implies that the purchasing power of Nigerians continues to weaken”. The GDP per capita (PPP) amounted to US$4916,72 in 2020 and was estimated to balance at US$5100 by the end of 2021. With Nigeria’s nominal GDP per capita having rested at US$2396,04 in 2020 and its value having been estimated to settle at US$2360,00 in 2021, one might assume that Nigeria’s purchasing power had the potential to rise in 2021, but local news reflect a different reality. According to the Premium Times Nigeria, “nine in 10 in some states – live on less than N377 daily”, which might explain why Nigeria’s government discussed about transport grants in November 2021 – some of which were criticized to constitute a populist policy action.
In any case, Nigeria’s rampant issue with poverty can certainly not be solved through reductions on transport alone. In 2020, the Nigerian National Bureau of Statistics revealed that 40% of Nigeria’s population live in poverty with estimations suggesting that until this year this number will have risen by a further 5%. If the estimations are right, this would mean that 93,38 million Nigerians struggle with poverty in the third year amid the COVID-19 pandemic. In addition, inequality was proclaimed a serious issue prior to the beginning of the COVID-19 crisis in 2019, when Nigeria “listed poverty and inequality as national security threats in her 2019 National Security Strategy”. Both in 2018 and 2019, Nigeria’s Gini coefficient amounted to 0,351, which – according to the United Nations’ classification, would illustrate an adequate level (0,3-0,4) of income inequality. What however has to be said, is that the adequacy of this number inevitably relies on correct GDP and income data.
Beyond that, the Gini Index has been criticized for excluding the income of the informal sector, for failing to capture absolute differences in income, for being an unsuited measure in “[i]n agro-based subsistence-driven economies” and for providing no insights about the effect of different income tax regimes on final incomes. While there is no consensus about the exact size of Nigeria’s informal economy, some researchers argue that between 1970 and 2018, it made up for 47-67% of the country’s GDP. Other researchers suggest that on average, Nigeria’s informal economy makes up for 64,6% of the latter. Irrespective of the exact number, Nigeria’s informal economy is huge. Meanwhile informal workers were hardly able to save money in 2021 at all. It was especially business owners in the informal sector, who also have laid open that their access to credit and capital has been severely restricted during the COVID-19 pandemic. The latter illustrates that a well-off economy is one that is inclusive rather than ‘high-scoring’.
In October 2021, Nigeria’s lending rate amounted to 11.610 % pa. From March to September 2021, the lending rate kept increasing, except for one smaller decline in August 2021 and with interest rates stabilizing at 11,5%. Despite that Nigeria’s interest rate is small now in comparison to during the period between 2017-2019 with its lending rate being the lowest in the last 25 years, this does not mean that Nigeria is doing well. As mentioned before, Nigeria’s informal workers hardly had access to credits and capital in reality. Beyond that, Nigeria’s interest and lending rates also dropped during the 2007-2008 global financial crisis (GFC), because central banks reinforced low interest rates to prevent the risk of deflation and stimulate economic growth and recovery. Whereas low interest rates might be a short-term remedy, in the long-term, they can produce a number of undesirable effects. As the Reserve Bank of Australia explains, upholding low interest rates during a long period of time can lead to “damag[ing] bank profitability and reduc[ing] the capacity of banks to lend…[,] allow[ing] less productive firms to survive when they normally would not be viable…[and] fuel[ing] excessive increases in asset prices (e.g. rising prices of houses and shares) despite weak economic growth”.
Especially, because affordable, sufficient and adequate housing constitutes an issue in Nigeria today, with corruption also permeating the real estate sector, Nigeria’s economy is not at all serving its citizens well. Financial instability is a reality irrespective of a few seemingly positive developments. In December, Nigeria’s struggles were criticized by the World Bank. Although the latter institution highlighted that Nigeria “took bold measures to mitigate the effects of the COVID-19 pandemic in 2020”, it also emphasized that these measures were “undermining Nigeria’s long-term growth prospects”. Making over a US$700 million loan to improve water supply in Nigeria in December 2021, the World Bank might certainly have hoped to also affect changes in other areas. As its ‘Nigeria Development Update (NDU)’ from late November 2021 hinted, the World Bank particularly expected from Nigeria to work on macroeconomic, “pre-crisis challenges [which might] threaten the post-crisis recovery”.
Notably, by macroeconomic challenges, the World Bank has referred to “[i]ssues around the predictability and credibility of exchange-rate management the insufficient supply of foreign exchange (FX)…, the unsustainable subsidy for premium motor spirit (PMS), burdensome trade restrictions, and the sizeable fiscal deficit financing by the Central Bank of Nigeria (CBN)”. On-top come the following recommendations: 1) to reduce inflation, 2) to protect poor and less privileged communities to make sure that Nigeria’s economic recovery will be inclusive, 3) to find a way to deal with the issue that “most states rely heavily on intergovernmental transfers”, 4) to refocus its investments in physical and human capital, which have been derailed by the PMS, 5) to rebuild Nigeria’s labour market, 6) to make financial services accessible to small and medium-sized businesses (SMEs) and, 7) to invest in Nigeria’s digital future.
Irrespective of whether one may agree with the World Bank in all terms or not, Nigeria’s skyrocketing youth unemployment rate, which amounted to 53,4% in January 2021, certainly suggests that labour market changes are urgent. Especially, because entrepreneurship is one way to empower Nigerian youth, reforming the labour market must be accompanied by reforming access to finance – and that is beyond loans for SMEs – viable or not. After all, sustainable development suggests that investments into one area of life are needed to positively affect another area of life, which is a rather different interpretation of the trickle-down theory and a thought, which is partially also embedded in the Human Development Index (HDI). Different than the Gini coefficient, the HDI addresses several dimensions, namely those related to a long and healthy life (i.e. life expectancy at birth, life expectancy index), knowledge (i.e. expected and mean years of schooling, education index) and a decent standard of living (i.e. GNI per capita, PPP $; GNI index). In 2019, Nigeria ranked 161st out of 189 with an HDI value of 0,539, which suggests a low human development according to the UNDP classification.
Whereas life expectancy at birth is estimated at 54,7 years and expected years of schooling at 10 years, with GINI measures having been addressed above, the employment to population ratio amounted to 48,6% with a labour force participation rate of 52,9% ( female: 47,9% / male: 57,9%). Based on the premise that the remaining 47,1% could either be unemployed or be a part of Nigeria’s informal economy, financial services seem particularly important considering the protection of informal workers and unemployed citizens. As simple as it is – whereas sustainable development might trickle down in the long-term, Nigeria’s citizens should be able to afford basic necessities at any given moment. Especially, when citizens need smaller loans to cover basic needs, health needs of a family member or the maintenance of their small-scale businesses, fintech could certainly offer some solutions.
A quite interesting question could for instance be, whether and how international companies should be obliged to pay a contribution to local development, local communities and individual citizens when relocating to Nigeria with their business. Fintech companies might want to play with the idea on how to address welfare to stand up for social and financial justice and inclusion. Last but not least, because Nigeria has been struggling with various types of corruption, fintech companies should especially seek ways to compensate victims of corruption. With the latter cutting into the pocket of especially poor households, Nigeria needs sustainable and accessible finance over ‘economic’ well-being.
Whether you are a start-up or an investor, if you have an interest in fintech in Nigeria, Africa or Germany – reach out to us for competent legal support! We employ legal experts with knowledge across various African jurisdictions and have experience with giving advice on topics such as labour and immigration, tax and customs, contracts and negotiations, corporate governance and compliance as well as data protection. Next to our African offices, we also have an office in Frankfurt! Whereas our mission is to make a societal change, we are of course also curious about the exact vision, which you have in mind! Contact us for an initial consultation today.