Building on its ambition to become the world’s 20th largest economy by 2020, Nigeria continues to drive its policy actions in various economic sectors and its macroeconomic management. According to African Development Outlook report, the country has enjoyed sustained economic growth (see Chart Nigeria’s Real GDP Growth) where the non-oil sector has been the main driver of growth, with services contributing about 57%, while manufacturing and agriculture, respectively contributed about 9% and 21% in 2014.
Africa, as a continent, is emerging as an important contributor to the world’s global growth and expected to return to the impressive growth levels seen before the global economic crisis. According to AfDB estimates, Africa’s gross domestic product (GDP) growth is expected to strengthen to 4.5% in 2015 and 5% in 2016.
In optimising potential growth the region, and Nigeria in particular, infrastructure development is central to this. Establishing transportation, energy and water networks among others are crucial in realising aspirations of African countries to alleviate poverty, enable job creation and support sustainable development goals. According to the World Bank, the region has an infrastructure financing gap of USD35bln per year. The World Bank also identifies power sector as Africa’s largest infrastructure deficit and shared that the 48 countries of Sub-Saharan Africa (with a combined population of 800 million) generate roughly the same amount of power as Spain (with a population of 45 million). Its power infrastructure only represent a fraction from what’s available elsewhere in the developing world. The Institute of Appraisers and Cost Engineers (IA&CE) estimated that Nigeria would require about $2.9 trillion of investment to support its infrastructure gap in the next 30 years.
In recent years, the growing interest of Islamic finance in the region has also pave way for the region to explore Islamic finance funding avenue to partly shoulder the infrastructure needs of the region. The Islamic financial industry has now reached USD2 trillion mark and has grown beyond Islamic countries. Sukuk market in particular, the sukuk outstanding volume has reach USD321 billion as at end 2015. Sukuk can be structured in various different ways based depending to nature of the underlying projects or nature of issuers’ business. In Africa, sukuk as funding avenues is still relatively untapped. Total sukuk issuances from the Africa only represents less than 1% of total global sukuk issuances.
Global Outstanding Sukuk
In this sukuk domain, Nigeria has witnessed its inaugural NGN10bln (USD62mln) sukuk issuance by the State of Osun in 2013. Osun infrastructure sukuk represents Sub-Saharan Africa’s first sukuk issuance where the proceeds are used to construct roads and school. Agusto & Co., a local rating agency gave the sukuk an ‘A’ rating.
|Snapshot of the State of Osun (Nigeria) – October 2013|
|Name||Osun Sukuk Limited|
|Sector||Infrastructure / Education|
Though no subsequent issuance was made after that, recently the Nigeria’s debt management office (DMO) and capital market regulator announced its plan on a debut issuance of sovereign sukuk before the end of the year. The move by the Government is aimed at spurring a more liquid debt market as well as to leverage on sukuk market as part of its avenue for meeting the country’s infrastructure needs for the country to become one of the top 20 economies in the world by the year 2020. Furthermore, the country aims to attract investment from Gulf countries and Islamic investments from other established Islamic markets to take part in Nigeria’s economic development process. Based AfDB and Nigeria plans, through its “Leveraging Partnerships for Economic Transformation and Inclusive Growth” Report, identified the following projects and programmes approved by the AfDB under the Country Strategy Paper to be implemented in Nigeria over the next few years:
- Economic and Power Sector Reform Programme, (Budget support loan of UA 100 million or US$ 155 million)
- Urban Water Supply and Sanitation Improvement Project in Oyo and Taraba States (loan of US$ 75 million)
- Small Scale Enterprises Project through two sovereign guarantee loans to the Bank of Industry (US$ 500 million) and the Nigeria Export and Import Bank (US$ 200 million).
- Innovative Capacity Building for Public-Private Partnership in Infrastructure Projects (US$ 33.78 million).
- Urban Water and Sanitation Project in Zaria (loan of US$ 99.1 million).
Nigeria presents economic opportunities to prospective investors. The country is endowed with various natural resources including gold, iron ore, coal, and limestone. Report by AfDB highlighted the country retain 37.2 billion barrels of proven oil reserves; 187 trillion cubic feet of proven natural gas and have opportunities for fertilizer and liquefied gas production. Agricultural and manufacturing potentials are also tremendous. However it can only be realised through modernisation and industrial development process that would require significant infrastructural expansion.
Registering Property: Nigeria made transferring property in Lagos less costly by reducing fees for property transactions.
Protecting Minority Investors: Nigeria strengthened minority investor protections by requiring that related-party transactions be subject to external review and to approval by disinterested shareholders. This reform applies to both Kano and Lagos.
Getting Credit: Nigeria improved access to credit information by distributing credit information from retail companies. The country has also improved its credit information system through a central bank guideline defining the licensing, operational and regulatory requirements for a privately owned credit bureau.
Trading Across Borders: Nigeria speeded up exporting and importing by upgrading facilities at Apapa port in Lagos.
Starting a Business: Nigeria made starting a business easier by introducing an online system for company name search and increasing efficiency at the company registry.
Dealing with Construction Permits: Nigeria made dealing with construction permits easier by setting an official time limit for issuing permits
Mobilisation of private funds is part of the strategies to support the significant funding needs for the country’s infrastructure funding needs. Based on AfDB estimates, the funding requirements for the private sector portion of the proposed Infrastructure Action Plan amounts to about US$ 131 billion for 2011 to 2020 where about US$ 96 billion to be used for investment in infrastructure assets and related technical studies and about US$ 35 billion for the upgrade and expansion of the transport fleet. The plan is to mobilise private sources through equity participation and debt mobilized in the domestic and international financial markets. The country is also gradually improving its business environment through a gradual reforms as captured by the Doing Business Reports by the World Bank. Despite the on-going business reforms, challenges remain and needed to be addressed in the journey to develop efficient business environment for the investors and effective financial markets to mobilise private funds. These are critical considerations to enable private sources in situation where country has fiscal revenue limitations and declining commodity prices environment.
In the Islamic finance sphere, a number of regulatory initiatives by Central Bank of Nigeria (CBN) has provided the basic framework of Islamic financial products. A case in point, the Securities and Exchange Commission of Nigeria (SECN) has issued regulations for Nigerian companies to issue sukuk. The planned sovereign sukuk issuance by Nigeria form parts of its initial aim to establish an international financial centre, which includes the provisions of Islamic financial products. Infrastructure sukuk has been well-utilised in the GCC and Asian countries, by government and corporate issuers. It is just a matter of time before African issuances will join the pact to drive the global sukuk issuances given the continent’s large infrastructural development plans.