To 5 growth sectors in Nigeria's economy

As global investors look to Africa for growth opportunities, the focus on Nigeria (Africa's largest and most populous economy) is increasing, and for good reason. Data released this year shows the West African nation's is far more diverse than previously understood. Sectors such as agriculture and trade are actually quite large and fast-growing, and could soon near the worth of the oil sector.

But there are deep-seated and well-known challenges in Nigeria that can potentially stifle government's ambition for inclusive growth. Latest concerns about terrorism and poverty are worrying and overshadowing the other side of Nigeria that brims with opportunities and promise.

A new report by McKinsey Global Institute examines the country's economic potential and finds that with the right reforms and investments, it can become one of the world’s leading economies by 2030.  

“What people overlook is Nigeria’s extraordinary advantages for future growth, including a large consumer market, a strategic geographic location, and a young and highly entrepreneurial population,” says Reinaldo Fiorini, director and location manager of McKinsey’s Lagos office.

The results of Nigeria’s progress have not been spread evenly across its economy. More than 40% of the population live below the nation’s official poverty line and 130 million (74% of the population) live below the MGI Empowerment Line - a level of income and access to vital services that provides a decent standard of living.

The reasons for Nigeria’s persistent poverty include low farm productivity due to limited access to fertilizer and mechanized tools, and inefficient markets. At the same time, urbanization has not raised incomes the way it has in other developing economies.

According to the McKinsey report, Nigeria has the potential to expand its economy by roughly 7.1% per year through 2030, raising GDP to more than $1.6-trillion. This could make it a top-20 global economy - with higher GDP than the Netherlands, Thailand, or Malaysia in 2030. What’s more a large consuming class is developing in Nigeria, with potentially as many as 160 million members by 2030, more than the current populations of France and Germany combined.

This upside scenario is based on a bottom-up analysis of the potential for five major sectors of the Nigerian economy:

Trade

Given the expansion of the consumer class, we project that consumption could more than triple, rising to almost $1.4-trillion a year in 2030, an annual increase of about 8%. This would make trade the largest sector of the economy and provide a particularly good opportunity for makers of packaged foods and fast-moving consumer items such as paper goods, categories that could grow by more than 10 percent a year.

Agriculture

Improvements on several fronts could help raise both the volume and the value of Nigeria’s agricultural production in the next 15 years. The economic value of agriculture, already the largest sector of the economy, at 22% of GDP, could more than double, from $112 billion a year in 2013 to $263 billion by 2030

Infrastructure

On average, the value of a nation’s core infrastructure—roads, railways, ports, airports, and the electrical system—represents about 68 % of GDP, but in Nigeria it is only about 39%. Between core infrastructure and real estate, total infrastructure investments in Nigeria could reach $1.5-trillion from 2014 to 2030. This would make building infrastructure not only a major contributor to GDP but also an enabler of growth across the economy.

Manufacturing

Though growing rapidly, manufacturing in Nigeria contributed just $35-billion to the economy in 2013, or about 7% of GDP. If Nigeria could match the performance of nations such as Malaysia and Thailand when their manufacturing sectors were expanding rapidly, output could reach $144-billion a year in 2030.

Oil and gas

While the oil-and-gas sector is expected to grow by 2.3% a year at best, its success is still vital to Nigeria’s economy. With the right reforms, we estimate that liquids production could increase from an estimated 2.35 million barrels a day, on average, in 2013 to a new high of 3.13 million by 2030. Oil and gas would then contribute $108-billion annually to the economy, compared with $73-billion in 2013. However, this estimate of potential output assumes renewed investment to reverse the production declines of recent years.

Nigeria’s government has put in place clear strategies and plans for various sectors, and the most important step that it can take now is to improve its ability to deliver its programs and services. The country can also capitalise on several favorable trends such as rising demand from emerging economies, growing global demand for resources, and the spread of the digital economy.

“By capitalising on its strengths and positioning itself to take advantage of emerging global trends, Nigeria could potentially triple its GDP by 2030,” says Acha Leke, a director in McKinsey’s Nigeria office. “This adds up to a huge opportunity for inclusive growth that should not be missed.”