The Governor of Lagos State, Mr. Akinwunmi Ambode presented this paper at the London School of Economics, Africa Summit 2016. I felt the paper had a lot of depth and content useful for those interested in the finer details so I decided to publish it here.
Distinguished Ladies and Gentlemen
Let me start by saying how delighted I am to address you all at the 3rd Annual LSE Africa Summit. I am not only honored to be at an institution recognized for facilitating insightful discussions about Africa’s contribution to the world, but also excited to be actively involved in this event which seeks to create a platform that inspires actions to achieve Africa’s potential.
Africa’s biggest economies have enjoyed improved social and economic performance for more than a decade, but are now facing significant headwinds following the adverse shock in commodity prices. Growth has slowed, coming in at 3.5% in 2015, down from 4.6% in 2014[1], the weakest pace since 2009.
But I want to step back from the short-term difficulties and focus on Africa’s long term potential. But let me start in China. In 1983, China had not a single private sector car. Its economy was miniscule and did not register on the international landscape. It made great progress in the 1990s, but even in the early 2000s when Goldman Sachs said it would become the world’s biggest economy by 2048, the idea was ridiculed. And it was right to be criticised – Goldman Sachs was grossly mistaken. China will be the world’s largest economy by 2018 – basically now – Goldman Sachs was off by 30 years.
I tell this story, because we are on the cusp of a similar transformation in Africa. And Europe and the world desperately need – as much as Africa itself – for this transformation to succeed. Why? Well, today’s mega trends give cause for this optimism. These include:
- Transformational urban swell – by 2050, two in three Africans will be urban,
- Large, younger and more affluent population – by 2050 Africa would account for almost 24% of the World’s population, and
- Africa’s dormant resources potential – Africa’s share of the world’s total of uncultivated land is 60%.
This transformation and growth in Africa will mean a more equal partner and more intense and deeper trade and commerce with the rest of the world. A prosperous Africa would end the great press of migrants trying to enter Europe.
For there to be real transformation, Nations and States must design their own path, with clear plans for growth and development, directed at achieving the Sustainable Development Goals (SDG’s). Chances of these being achieved are further enhanced when States/Cities such as Lagos play their part. I would therefore seize this opportunity to spice this presentation with some of the Lagos experience.
Strength In Size
In the 1960s, there were roughly 300 million Africans, and 400 million Europeans, and the world was not that well connected. By 2050, there will 2.4 billion Africans, and only 700 million Europeans.
Now, I am not sure about you … but if I was next door to 2.4 billion people, I would want them to be prosperous, peaceful, and socially stable. So all of Europe has a great interest in Africa’s success.
Nigeria is of course already Africa’s most populous nation. By 2050, Nigeria’s population will be 400 million, making it the world’s 3rd most populous nation, more than the US. This is a momentous change, and I do not think it is too much to say that Africa cannot succeed unless Nigeria succeeds.
Urban Migration
If we look at this picture which charts the population size of a selection of world cities with more than one million people, Lagos; the smallest state in Nigeria with a population of over 22million people, has the highest number recorded of urban growth with over 85 people moving to the city per hour as compared with cities in Europe such as London with only 9 people and America with only 10 moving to New York.
Source: UN World Urbanisation Prospects 2014/LSE Cities
The strength of our demographics offers investors hope in this gloomy era. With Nigeria’s growing population, and a burgeoning middle class, consumer spending (already estimated at 70% of GDP) is expected to increase even further. This coupled with a boom in mobile telecommunications and a rise in broadband penetration makes the retail and ICT sectors very attractive. Seeing as the services sector is projected to be a key driver of the Nigerian economy, contributing 53% to total GDP in 2015, measures will need be undertaken in order to develop the relevant skills and encourage innovation.
Efforts currently ongoing to promote Nigeria’s knowledge economy include the establishment of development hubs, technology parks, as well as a gradual increase in the budgetary allocation to education from 7% in 2015 to 20% over the next four years. The Lagos State government, in its pursuance of creating an enabling environment for young entrepreneurs, has established an Employment Trust Fund in which an equivalent of $250 million will be contributed by the State over four years in order to empower youths to create wealth, as well as encourage companies to invest in the technical and vocational skills required to boost income.
Responding To The Fall In Oil Prices
The massive fall in oil prices has sharply reduced Nigeria’s growth rate, export earnings, foreign direct investment, and government revenues. But if we are honest with ourselves, this provides us with an opportunity to now deliver real growth. The high price of oil created a distorted economic structure, where it was more valuable to capture value from the oil stream than create value. The returns to oil went to a few, with a tiny trickle down system to keep the social peace, but the reality is we squandered the oil wealth and arrived to 2015 with poor infrastructure, a poor education system, and poor level of social development.
The drop in oil prices has revealed that the one dimensional model of our political economy has outlived its shelf life. We are forced by the slump to change the architecture of our political economy. That is the challenge before us.
So, although Nigeria faces some tough time and tough choices with this new reality, I see the low oil prices as a tipping point for positive change. This downturn is an avenue for us, the leaders and citizens of the country, to address the sources of vulnerability in order to achieve inclusive growth and sustainable development. The tone of enhance Governance with focus on transparency and accountability has been established under the leadership of President Muhammadu Buhari.
We still have the financial band-width to immediately respond to the situation we find ourselves in. We actually are starting from a very good fiscal position. Our exceptionally low Debt-GDP ratio at 13% gives us latitude to be fiscally expansionary for productive expenditure that will stimulate the economy and create jobs.
At the same time, our tax collection is very poor – with tax-to-GDP estimated at 8%, the second lowest in Africa and the fourth lowest in the world. In fact, excluding government revenue from oil & gas, our tax receipts were only 3%. Even in Lagos where we have consistently achieved success in IGR collection, there is still significant scope for growth.
IGR GAPS
If properly implemented to Sub-Saharan African economies’ average of 18%, Nigeria could potentially raise its tax revenue to $103.3 billion, the equivalent of Morocco’s GDP in 2014[1].
[1] PwC Analysis using data from IMF World Economic Outlook
A higher tax revenue would reduce government borrowing and generate more funds to devote to areas where government spending is more productive than the marginal rate of private sector spending encourage financial institutions to offer funds at lower interest rates, thereby boosting the real economy.
But of course, if we ask for tax revenue, we in the government will have to deliver something. We need to imbibe fiscal discipline in delivering the public services that our citizens so rightly deserve. This calls for a greater autonomy of state and local governments, which in turn promotes accountability. If we look at Canada for example, its decentralism has played a great part in its growth and success, allowing for maximum provincial authority in the fields of healthcare, education, taxation and social benefits. In terms of specific sectors, the first step lies in harnessing Nigeria’s potential in the non-oil sectors, focusing particularly on Agriculture, Manufacturing, Solid Minerals, and Service sectors which in aggregate represent 90% of GDP.
We have a superb climate and abundant water and Nigeria’s global agriculture exports should take off at a rate similar to Brazil’s, with a potential $60 billion in export revenues by 2030[1]. Given that agriculture is still largely at subsistence levels, we need to re-invigorate inter-state collaboration so as to establish commodity value chains. Already, Lagos state has partnered with Kebbi state in developing a commodity value chain that will see the local production of 70% of Nigeria’s rice needs.
I firmly believe that forward integration with agro-processing as well as backward integration with input supply sectors would improve farm incomes, create jobs and contribute towards domestic self-sufficiency. In addition, it will solve our FX challenges, as a significant amount of our Foreign Exchange goes to importing food in a country that should be a world food super-power.
Infrastructure Development As Avenue For Stimulating The Economy
Despite the ongoing interventions, structural challenges still persist. The rapid urbanization rate puts pressure on Nigeria to provide quality infrastructure so as to improve its global competitiveness and create a thriving business environment.
The value of Nigeria’s core infrastructure is currently estimated at 39% of GDP, which is significantly below the benchmark average of 68 percent[2]. Nigeria’s road density is 14% that of India and power generation capacity is just 20% that of India. Lagos, one of the world’s fastest growing cities with a population of over 22 million expects economic growth of 7% this year, twice the pace of Nigeria as a whole. There is no other state that faces pressure on its infrastructure as Lagos does. It will require more housing, offices and retail outlets- meaning that there is still a great window of opportunity for private investment in the construction sector.
The Federal Government has strategically increased capital spending to 30% of expenditure, aimed at improving transportation networks and power delivery which would facilitate market linkages, market development, as well as encourage domestic and intra-regional trade. As a state, Lagos has increased its efforts by targeting infrastructure spending towards improving the condition of inner roads- almost 150 due to be completed within one year of my assuming office. We are now in discussions with private and institutional investors who have shown interest in game changing projects such as the Badagry deep sea port, the 4th Mainland bridge, development of new cities around the Lekki Free Trade Zone, where Dangote Refinery is located and scheduled to come on stream in 2018.
Also recognizing that power and security challenges enhance business success. We have invested significantly in security, funding and equipping the police with the Securities Trust Fund initiative. Our ‘Light Up Lagos’ initiative has also seen us connecting 67 communities of the state to the national grid and major roads fully lit. Whilst we are steady heading in the right direction we clearly still have huge infrastructural gap.
Lagos – City Of Opportunities
The Lagos delivery model is based on strategic imperatives built on four pillars: Infrastructure Development, Economic Development, Social Development and Sustainable Development. These pillars are underlined by enhanced Governance structures.
However, despite Lagos’ challenges, let’s be clear on one thing: Lagos is now the commercial centre of Africa. Despite not being an oil producing state, we are one of the few states that are self-sustaining with our Internally Generated Revenue growing by 84% to $1.4 billion in 2014 compared to 2010[3].
Our strength lies in our demographics. The population is nearing 22 million of which a large proportion fall within the ages of 18-40- a ready labour force! We pride ourselves as the 5th largest economy in Africa with our GDP estimated at $131 billion in 2014 compared to Johannesburg’s GDP of $83 billion. This makes a strong case for Lagos not just as a promising market, but as an emerging global centre, with Africa’s lead in financial services, ICT, hospitality, and other high value-added sectors. We are committed to the vision of making Lagos state Africa’s Model Megalopolis and Global Economic and Financial Hub that is safe, secure, functional and productive. This is evident in the recent establishment of Lagos Global a one-stop shop for investors.
At a broader level, Nigeria has a large regional footprint with the possibility to be the hub of West Africa. It is a nation brimming with potential that can achieve economic success in the future, if steered in the right direction. I see an era in which we can utilize the resources of the people to build a future that includes the people.
Closing Thoughts
So where will all this end up? A recent PwC report has projected that in 2050, Nigeria would be the world’s 9th largest economy, ahead of UK, France, and Germany. That is, if it makes the type of reforms we have been discussing and takes advantage of its immense human capital and natural resources. Everyone in this room has a role to play in this journey and I am counting on your support to help us make it a reality.
Since May 2015 when the new APC Leadership assumed office, there has been a massive influx of foreign governments and private sector potential partners who recognize the potential of the Country and respective States. We in Lagos have had more than a fair share of these future investors. We recognize that we have to provide the right climate to make the partnership work, and improving the ease of doing business.
Another exciting journey for Africa has started and as I said at the outset, whether you are in Africa or in Europe, you have a strong incentive to make Africa succeed.
I thank you all for your attention.
Mr. Akinwunmi Ambode
Governor of Lagos State
23RD, April, 2016
[1] PwC Analysis- Looking Beyond Oil
[2] McKinsey Global Institute
[3] PwC Analysis using data from National Bureau of Statistics
ADDRESS PRESENTED BY HIS EXCELLENCY, MR AKINWUNMI AMBODE, GOVERNOR OF LAGOS STATE, AT THE 3RD ANNUAL LONDON SCHOOL OF ECONOMICS (LSE) AFRICA SUMMIT ON APRIL 23, 2016
