Nigeria Charting a Country Economic Memorandum Technical Notes New Course Nigeria Country Economic Memorandum: Charting a New Course Technical Notes December 2022 Report No. AUS0002837 © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover credits: "Contact" by Jimmy Nwanne. This painting refers to man’s curiosity and inquiry about the source of life. It speaks about the possibility of life beyond the walls of our world and planet. If we have life outside our world, how do we access this dimension in order to communicate? To become, we have to enter different states of consciousness. ii TECHNICAL NOTES  |  CHARTING A NEW COURSE Contents Abbreviations and Acronyms x Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 2 1.1  The country that currently has the least access to electricity in the world needs a power sector capable of meeting demand as it grows 2 1.2  After privatization in 2013 and before 2021, tariff regulation and market contracts were not fully enforced and policy direction was inconsistent, creating a permanent crisis 4 1.3  The government funding to the sector to cover the tariff shortfalls did not benefit the poor 7 References14 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 16 2.1  Increasing and diversifying exports and FDI is central to advancing Nigeria’s industrialization and development objectives 16 2.2  Import restrictions undermine the country’s development goals 26 2.3  Finding the right balance: how industrial and trade policy can contribute to Nigeria’s development aims  34 References38 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 41 3.1  Introduction and Context 41 3.2  Constraints to Demographic Transition through the Lens of Nigeria’s Adolescent Girls 46 3.3  Policy Measures to Accelerate the Demographic Transition to Harness the Demographic Dividend 53 References58 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 61 4.1  Africa’s biggest economy also has Africa’s lowest tax-to-GDP ratio: Nigeria must mobilize far more revenue if it is to capitalize on its immense economic potential 61 4.2  The economy has adequate space for administrative and policy reforms that do not negatively impact investment and growth 63 4.3  Excise tax can help lower the cost of environmental pollution, improve health prospects, and boost tax revenue by up to 1 percent of GDP 63 4.4  The electronic money transfer (EMT) levy is a stable revenue source with potential to raise up to N220 billion in 2022 63 4.5  Reforms of corporate income tax (CIT) can seal loopholes without raising the tax burden on compliant corporations, potentially raising revenue by 0.7 percent of GDP 65 4.6  VAT reforms introduced in the Finance Act 2019 can raise 0.4 percent of GDP in revenue, and another 1.4 percent could come from better compliance 65 4.7  In the medium term, tax concessions should be rationalized to reduce market distortions  66 4.8  Improving tax administration by sealing compliance gaps can bridge the revenue gap caused by low economic activity in the wake of a global economic downturn 66 List of Contents iii NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 4.9  Adopting a digital transformation strategy for an ICT-driven FIRS and enhancing its organizational efficiency will allow FIRS to weather future crises better 67 4.10 Reforms to state tax administration can supplement federal revenue collection efforts, internally generated revenue (IGR) being the third-largest source of non-oil revenue after VAT and CIT 67 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 74 5.1  Background and Context 74 5.2  Economy-wide government interventions that affect competition and the performance of Nigerian markets82 5.3  Sector-specific barriers to competitive market dynamics: Examples from ICT and digital financial sectors  92 References105 Annex 5.1 108 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 110 6.1  A job-market crisis before the crisis 111 6.2  A long-standing pattern of informal and precarious work  113 6.3  Leaving school, seeking work: risky trade-offs for youth in crisis times  122 6.4  Growing labor-market precarity, especially among youth  126 6.5  Differential impacts of economic crises on the poor and on women and girls 130 6.6  Taking action for good jobs: policy options 135 Annex 6.1  Definitions and data sources  138 Annex 6.2  Estimating the impact of the 2016 oil recession on working and schooling for young Nigerians 140 Annex 6.3  Additional figures  143 Annex 6.4  Additional tables 145 References146 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 149 7.1  Agribusiness for Economic Diversification and Jobs 149 7.2  Raising agriculture productivity sustainably by accelerating the development and dissemination of adaptation strategies that build resilience to agroclimatic shocks  151 7.3  Increasing smallholder farmers’ access to credit for long-term investments and short-term working capital 153 7.4  Effective coordination of investments in agribusiness value chains using approaches that co-locate investments with critical infrastructure 155 7.5  Conducive Macroeconomic, Trade, and Sectoral Policies 156 References162 iv List of Contents TECHNICAL NOTES  |  CHARTING A NEW COURSE List of Figures FIGURE 1.1. Nigeria’s unreliable, and for many inaccessible, power supply is a threat to economic growth 2 FIGURE 1.2. The power sector is unbundled and largely privately owned 4 FIGURE 1.3. In 2020, the power sector had to deal with five different types of problems 5 FIGURE 1.4. The FGN has had to step in to cover shortfalls and let the energy flow 5 FIGURE 1.5. Keeping tariffs low benefits the rich more than the poor 7 FIGURE 2.1. Extractives exports have dominated over the past decades 17 FIGURE 2.2. FDI inflows as a share of GDP (percent) have been low and declining 17 Essential conditions for increasing Nigeria’s gains from more trade and investment  FIGURE 2.3.  18 FIGURE 2.4. Nigeria has the least-diversified economy in the world apart from Angola 19 The dominance of mineral and fuel exports became stronger recently and has not changed FIGURE 2.5.  significantly since the early 1970s 19 FIGURE 2.6. Trade openness has declined over the years  20 FIGURE 2.7. Nigeria’s trade as a share of GDP lagged most peer countries in 2019 20 FIGURE 2.8. Imports follow the (oil) export trajectory 20 FIGURE 2.9. Services exports have been increasing but significantly lag imports 20 FIGURE 2.10. Non-oil exports to Africa remain relatively low and have been in decline since 2017 23 FIGURE 2.11. Nigeria’s oil and non-oil exports to Africa are less than 10 percent of total exports 23 FIGURE 2.12. Remittances have become more significant as FDI has declined  24 FIGURE 2.13. Equity holdings make up the largest share of inflows  24 FIGURE 2.14. Nigeria’s tariffs are among the highest in the world, especially for capital, intermediate and consumer goods 28 FIGURE 2.15. As tariffs increase, evasion increases too 29 FIGURE 2.16. Evasion and protectionism 29 FIGURE 2.17. Impact of FX restrictions on revenues 30 FIGURE 2.18. Without tariff evasion, Nigeria’s revenues would be significantly higher 30 FIGURE 2.19. The price of both imported and domestic rice increased after the border closure 31 FIGURE 2.20. Changes in welfare and poverty linked to price changes after the border closure 31 FIGURE 2.21. The impact of liberalizing trade would vary by state depending on what households consume and produce 32 FIGURE 2.22. Import taxes and restrictions result in higher production costs and domestic industry protection3933 FIGURE 2.23. Nigeria could reform its tariff schedule to reduce production costs while increasing revenues 34 FIGURE 3.1. Nigeria's stalled demographic transition 43 The TFR in Nigeria is highest in the North, among females with no education, and among the FIGURE 3.2.  lower wealth quintiles 43 Nigeria's adolescent fertility rate is significantly higher in the Northern States and is high FIGURE 3.3.  compared with its income level 45 Adolescent well-being, demographic transition, and its consequences for potential demographic FIGURE 3.4.  dividend in Nigeria 46 FIGURE 3.5. Early marriage and teenage pregnancy rates in Nigeria in 2016/17, by wealth quintile 47 List of Contents v NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Percentage of Nigerian secondary school children age attending secondary school or higher, by FIGURE 3.6.  location and wealth quintile, 2016/17 47 Nigeria has very low prevalence of modern contraceptives nationally and especially in the North FIGURE 3.7.  East and North West 48 Most fertility in Nigeria is wanted fertility with low demand for family planning, especially FIGURE 3.8.  among adolescents 49 Nigeria has the highest U5MR in the world despite seeing rapid decline in the past 50 years, FIGURE 3.9.  largely due to the high prevalence of childbearing among adolescents 49 FIGURE 3.10. Nigeria's youth faced unemployment rate of 53 percent at the end of 2020 51 FIGURE 3.11. Nigeria has some of the highest prevalence of early marriage in the world with the practice of early marriage rampant in many of Nigeria’s Northern states 52 FIGURE 3.12. Targeting adolescent girls with holistic support is critical to reducing fertility and accelerating the demographic transition in Nigeria 53 FIGURE 4.1. Nigeria’s revenue collection is the lowest among SSA peers 61 FIGURE 4.2. Nigeria’s high revenue potential stands out among global peers  61 FIGURE 4.3. Driven by crises, general government revenue continues to fall 62 FIGURE 4.4. The revenue gap between Nigeria and its peers continues to widen 62 FIGURE 4.5. Sequenced reforms will best mobilize revenue 64 FIGURE 4.6. Nigeria’s excise tax revenue is among the lowest in SSA 64 FIGURE 4.7. Marginal improvement has consequential revenue implications 64 FIGURE 4.8. There is ample space to raise excise rates for alcohol and cigarettes 64 FIGURE 4.9. Nigeria’s excise rates are lower than those of its peers 64 FIGURE 4.10. Bridging compliance gaps would greatly enhance VAT receipts 66 FIGURE 4.11. Reviewing tax expenditures alone can double current revenues 66 FIGURE 4.12. Nigeria collects less in property tax revenue than its SSA peers 68 FIGURE 5.1. Impact of competition policy in productivity, jobs, and diversification 76 Nigeria scores below peers in terms of the degree of market-based competition and competition FIGURE 5.2.  policy77 Business risks related to weak competition policies are perceived to be relatively higher in FIGURE 5.3.  Nigeria compared with peers  77 Manufacturing sector markets appear to be relatively unconcentrated in Nigeria but there is a FIGURE 5.4.  disproportionate percentage of monopolies 78 FIGURE 5.5. Percentage of respondents that perceive themselves to be monopolies 78 FIGURE 5.6. Nigeria is outperformed by several peers in terms of the extent of market dominance in markets 78 Concentration levels in selected manufacturing and services sectors of Nigeria's economy fall FIGURE 5.7.  above the 2,500 threshold, considered to be “highly concentrated” 78 Constraints to competition may be contributing to higher prices in Nigeria relative to other FIGURE 5.8.  countries  79 FIGURE 5.9. A holistic competition policy framework encompasses three pillars 81 FIGURE 5.10. ACF-WBG IBCA – Independence indicator 85 FIGURE 5.11. ACF-WBG IBCA, results of the efficiency indicator 87 FIGURE 5.12. Herfindahl-Hirschman Index in Nigeria's mobile markets 93 FIGURE 5.13. Network coverage (by population) and market penetration 93 vi List of Contents TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 5.14. Mean mobile internet download speed 93 FIGURE 5.15. Number of fixed broadband subscribers 93 FIGURE 6.1. A “youth bulge” that is not going away 112 FIGURE 6.2. High working rates before the COVID-19 crisis 115 High prevalence of work in household farms and non-farm household enterprises across FIGURE 6.3.  population groups 115 Household agriculture was more prevalent among poorer households, while wage work was FIGURE 6.4.  more prevalent among richer households 116 FIGURE 6.5. The prevalence of precarious work did not improve in the decade before the COVID-19 crisis 116 FIGURE 6.6. High shares of jobs were in agriculture, commerce, and services 117 FIGURE 6.7. Work in the agriculture sector was concentrated among poorer households 117 Structural transformation in reverse, 2010–19: more workers in agriculture, fewer in services FIGURE 6.8.  and industry 118 Youth, women, and those with lower educational attainment were more likely to work fewer FIGURE 6.9.  than 40 hours per week 119 FIGURE 6.10. More underemployment for poorer Nigerians 119 FIGURE 6.11. Wage work often meant more work hours per week than household agriculture or non-farm household enterprises 119 FIGURE 6.12. In-work benefits were less prevalent for younger wage workers 120 FIGURE 6.13. M ost non-farm household enterprises are small scale, with no external employees, especially in poor households 120 FIGURE 6.14. N on-farm enterprises that engaged in commerce were smaller scale, on average, than those engaged in industry and services 121 FIGURE 6.15. Low labor-market returns to secondary education 121 FIGURE 6.16. Working rates increased after the 2016 oil-price recession, particularly among youth 122 FIGURE 6.17. Stocks of human capital among young people declined after 2015/16 122 FIGURE 6.18. S econdary-school graduates after the oil recession: less likely to continue their education, more likely to work in household enterprises 124 FIGURE 6.19. Tough trade-offs between school and work: rising transition rates from school to the labor market after 2015/16 124 FIGURE 6.20. Higher working rates during the 2021 post-harvest season, amid COVID-19 125 FIGURE 6.21. An overall drop in school rates, largest among older children 125  e share of Nigerians engaged in household agriculture jumped after the 2016 oil-price FIGURE 6.22. Th recession127 FIGURE 6.23. I n a reversal of structural transformation trends, the share of working individuals in the agricultural sector increased after the 2016 oil-price recession 127 FIGURE 6.24. A mong youth, increases in working rates after the 2016 recession were also concentrated in household agriculture 128 FIGURE 6.25. Large increases in wage work among youth 129 FIGURE 6.26. In-work benefits for wage workers became less prevalent after the 2016 recession 129 FIGURE 6.27. Rising participation in non-farm household enterprises during the COVID-19 crisis 129 FIGURE 6.28. Sectoral shifts amid COVID-19: a jump in services and commerce 129 List of Contents vii NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 6.29. Incomes from non-farm household enterprises remained the most precarious as the COVID-19 crisis continued 130 FIGURE 6.30. After the oil-price recession, working rates increased most among non-poor Nigerians 131 FIGURE 6.31. Young people from non-poor households increased their working rates most after the 2016 oil-price recession 131 FIGURE 6.32. The share of both women and men working, especially in household agriculture, increased after the 2016 oil-price recession 132 FIGURE 6.33. Poorer Nigerians increased their labor supply more during the COVID-19 crisis 133 FIGURE 6.34. Women increased their seasonally-adjusted working rates more than men as the COVID-19 crisis continued 133 FIGURE 6.35. Women have been entering non-farm household enterprises during the COVID-19 crisis 134 FIGURE 6.36. Return to schooling after COVID-19: divergences by gender, age, and zone 135 FIGURE 6.37. Nigerian population, U.S. Census International Bureau estimates 143 FIGURE 6.38. Number of job types per individual, 2018/19 143 FIGURE 6.39. Average hours per week, by primary job type and number of job types 143 FIGURE 6.40. Educational attainment, people aged 20–25, excluding North East and North Central zones 143 FIGURE 6.41. Prevalence of price shocks experienced by Nigerian households 144 FIGURE 6.42. Shift in the share of people engaged in different sectors before and during the COVID-19 crisis, by gender 144 FIGURE 7.1. More than a decade of strong economic growth (2000–14) did not reduce the unemployment rate150 Agriculture is the most resilient sector, protecting livelihoods and jobs during tough economic FIGURE 7.2.  times150 Nigeria’s agribusiness segments grew faster and created more and better jobs than the overall FIGURE 7.3.  economy did, 2009–18 150 The average Nigerian farmer is a smallholder who relies on rain-fed agriculture with little FIGURE 7.4.  irrigation151 FIGURE 7.5. Public investments to support expansion of digital technologies in agriculture 154 FIGURE 7.6. The whole of agribusiness needs to grow concurrently to create 6 million jobs faster 155 FIGURE 7.7. Rice production in Nigeria responded to the trade restrictions 157 FIGURE 7.8. Rice yields in Nigeria have stagnated despite the trade restrictions 157 viii List of Contents TECHNICAL NOTES  |  CHARTING A NEW COURSE List of Tables TABLE 2.1. Estimated revenue losses under AfCFTA trade liberalization scenario 24 Prices in Nigeria (Lagos) are higher than in other in other countries worldwide for a basket of TABLE 5.1.  basic goods 80 TABLE 5.2. Price comparisons analysis: Lagos, Nigeria vs. cities in all other countries 108 Impact of the 2016 oil recession on secondary educational attainment of 20–25-year-olds in TABLE 6.1.  2018/19, Average Treatment Effects (ATEs) from counterfactual model predictions  141 Impact of the 2016 oil recession on active labor market status of 20–25-year-olds in 2018/19 TABLE 6.2.  post-planting Season, Average Treatment Effects (ATEs) from counterfactual model predictions 142 TABLE 6.3. Transition matrix for job type, post-planting visit, 2010/11 to 2012/13 145 TABLE 6.4. Transition matrix for job type, post-planting visit, 2012/13 to 2015/16 145 TABLE 6.5. Transition matrix for job type, post-planting visit, 2015/16 to 2018/19 145 Imbalanced use of improved seeds and inorganic fertilizers suggests technical inefficiency among TABLE 7.1.  many farmers in Nigeria 152 List of Boxes BOX 1.1. Understanding operational inefficiencies and their impact 6 FIGURE B1.1. From generation to retail: Inefficiencies in Nigeria’s power sector 6 BOX 2.1.The prospects of agricultural diversification through sesame 21 FIGURE B2.1. Nigeria’s share of world’s exports of sesame are growing 21 What is the demographic dividend and why is it important for accelerated economic growth and BOX 3.1.  development?44 FIGURE B3.1. The four stages of demographic transition 44 Regulation to foster efficient use of Nigeria's spectrum can help increase competition and quality of BOX 5.1.  service96 BOX 6.1. Data sources 111 BOX 6.2. Defining precarious work in Nigeria 114 BOX 7.1. The Babban Gona model in Nigeria 154 List of Contents ix NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Abbreviations and Acronyms AfCFTA African Continental Free Trade Area MAN Manufacturers Association of Nigeria AFR Adolescent Fertility Rate MDA Ministry, Department, Agency AFR Adolescent Fertility Rate MFN Most-Favored Nation ATC&C Aggregate Technical, Commercial, and MNO Mobile Network Operator Collection MVNO Mobile Virtual Network Operator BPE Bureau of Public Enterprises MYTO Multi-Year Tariff Order BTI Bertelsmann Stiftung’s Transformation NASC National Agricultural Seed Council Index NBET Nigerian Bulk Electricity Trading CBN Central Bank of Nigeria Company CIT Corporate Income Tax NBS National Bureau of Statistics COVID-19 Coronavirus Disease 2019 NCC Nigerian Communications Commission DDEI Demographic Dividend Effort Index NERC Nigerian Electricity Regulatory DISCOs Distribution Companies Commission ECOWAS Economic Community of West African NIPCAC Nigeria Industrial Policy and States Competitiveness Advisory Council EMT Electronic Money Transfer NIPSAS Nigeria Industrial Policy and FCCPA Federal Competition and Consumer Competitiveness Advisory Council Protection Act NLPS National Longitudinal Phone Survey FCCPC Federal Competition and Consumer NPC Nigerian Population Commission Protection Commission NTM Non-Tariff Measure FDI Foreign Direct Investment PEBEC Presidential Enabling Business FGN Federal Government of Nigeria Environment Council FIRS Federal Inland Revenue Service PIP Performance Improvement Plan FMARD Federal Ministry of Agriculture PIT Personal Income Tax FMITI Federal Ministry of Industry, Trade and PPP Public-Private Partnership Investment PSRP Power Sector Recovery Programme FSP Financial Strategy Paper QI Quality Infrastructure FX Foreign Exchange R&D Research and Development GDP Gross Domestic Product RoW Right of Way GENCOs Generation Companies SBT Service Based Tariff GHG Greenhouse Gas SMEs Small and Medium Enterprises GHS General Household Survey SMP Significant Market Power HHI Herfindahl-Hirschman Index SON Standards Organization of Nigeria HNWI High-Net-Worth Individuals SSA Sub-Saharan Africa ICT Information and Communications TCN Transmission Company of Nigeria Technology TES Tax Expenditures Statement ILO International Labour Organization TFP Total Factor Productivity IMF International Monetary Fund TFR Total Fertility Rate IMR Infant Mortality Rate U5MR Under-Five Mortality Rate LCDP Least Cost Development Plan VAT Value Added Tax LPM-LDM Linear Probability Model and Linear Discriminant Model WBES World Bank Enterprise Survey LUC Land Use Charges WBG World Bank Group WTO World Trade Organization x Abbreviations and Acronyms Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector Authors: Yadviga Semikolenova, Arsh Sharma, and Anshul Rana NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector Summary: Electricity not only fuels productivity, but it is 1.1  The country that currently has the also a vital catalyst of social development including better least access to electricity in the world health and education. According to the latest Tracking needs a power sector capable of meeting SDG7 report, 92 million Nigerians (45 percent of the demand as it grows population) have no access to electricity. Lack of reliable power stifles economic activity; in Nigeria, annual Nigeria’s power sector problems have serious economic losses from lack of reliable power are estimated repercussions for economic growth. With 45 percent1 at 5 to 7 percent of GDP—at a cost of US$25 billion. of the population (92 million people) lacking access to The transition to a largely privately owned sector did grid electricity, Nigeria has the world’s largest energy not bring about the outcomes expected. Inefficiencies in access deficit (FIGURE 1.1). Nationwide, for the poorest the system, such as high aggregate technical, commercial 40 percent of the population, access to grid electricity and collection (ATC&C) losses (about 50 percent), is only 31 percent2. Similar disparities exist between combined with the irregularity in applying the tariff regions and between rural and urban areas. Even those policy led to a breakdown of the electricity payment who are connected to the grid cannot rely on the supply; chain. In 2019 the tariff shortfall rose to N524 billion they must deal with frequent outages. Firms cite lack of (~US$1.7 billion), which was more than the total reliable power supply as one of the top constraints to Federal Government of Nigeria’s (FGN) health budget. their business. It was also fiscally unaffordable. The critical sector FIGURE 1.1. Nigeria’s unreliable, and for many finances kicked the government into action with a inaccessible, power supply is a threat to economic series of interventions backed by the World Bank. The growth interventions have led to some impressive changes- Nigeria’s consumption per capita, installed capacity, renewable share and access to electricity annual electricity supplied to the grid has increased by People without electricity access, million 19 percent, the sector is at 96.4 percent cost recovery, Consumption Capacity Renewables new annual tariff shortfalls are expected to be reduced (kwh/per capita) (MW/per million) (share in generation) from N245 billion in 2021 to N124 billion by the end of LMIC LMIC LMIC 2022, and the sector is moving towards better payment 515 138 26 discipline. However, to meet the twin government goals of universal access and net zero emissions while meeting Nigeria Nigeria 17 the exponentially growing demand of an expanding Nigeria 148 66 economy, several policy interventions and infrastructure improvements need to be made. Source: Tracking SDG7, 2020 and Doing Business 2020, IEA and EIA. With the electricity supply unreliable and insufficient, businesses and wealthy homes have 1 Tracking SDG7, 2022 report. Data is for 2020. 2 NBS survey data 2 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE turned to expensive gasoline-run generators. It is obstacle. Analysis indicates that the firms with a sales loss estimated that in Nigeria over 22 million gasoline and tend to be the ones reporting electricity as a moderate to diesel generators (“gensets”) power about 26 percent severe constraint and experiencing more power outages. of all households and 30 percent of micro, small and As the perception of reliable access to electricity worsens, medium enterprises (MSMEs); their net capacity firms have a higher probability of suffering sale losses. is estimated to be eight times more than capacity A one-unit increase in the number of power outages available to the national grid3. Inhalation of smoke increases the probability of sales loss by 0.001 percent. from gensets is linked to about 1,500 deaths annually4, While this might look like a small number, in 2014 (the not to mention its impact on the country’s total GHG year the survey was conducted) an average Nigerian firm emissions. The FGN plans to create a net zero emission was experiencing 384 outages annually. The 2014–2020 economy by 20605 and, in the interim, has committed period only got worse in terms of outages. to reducing its GHG emission by 45 percent by 2030 primarily from the energy sector6. Replacing the gasoline Unreliable electricity also has a negative effect on generators with clean energy solutions such as solar, the ability of Nigerian firms to compete with their presents a big opportunity for meeting this target. regional and global counterparts. Nigerian firms spend In 2021 alone the FGN is estimated to have spend significant amounts to arrange for supplemental power N1.4 trillion (US$3.4 billion)7 on subsidizing gasoline usually through gasoline or diesel-powered generators. consumption for genset consumption. On top of that, This results in increased production costs that reduces ordinary Nigerians spent an estimated N3.7 trillion their profitability and their capacity to create jobs, (~US$12 billion) on purchase and operation of gensets8. lowers productivity and negatively impacts their Annual economic losses from the unreliable electricity competitiveness. The grid connected tariff in 2019 was supply are estimated at about N7–10 trillion about US$0.08/kwh, making Nigerian electricity one of (~US$25 billion) - 5–7 percent of the GDP9, but the the cheapest in Sub Sharan Africa, potentially boosting losses will be much higher if the economic impact of firm competitiveness. However, widespread outages GHG emissions is taken into acount. mean that small and large commercial and industrial enterprises spend over US$0.40/kwh and US$0.46 Firms that experience power outages are more exposed respectively on electricity11. Such expenditures, without to sales losses compared to those that have continuous doubt, make electricity one of the largest components supply. Using the World Bank 2014 Enterprise Survey of a firm’s cost structure especially in the services sector. (WBES)10 database for Nigeria one can estimate the Nigerian firms are spending 4 times of even the cost- impact of reliable electricity on firms’ productivity. reflective tariff of US$0.12/kwh12 indicating that they The database records a firm’s perception of its power probably have a much higher willingness to pay for constraint as minor, moderate, major, and very severe reliable electricity than is generally perceived. 3 “Putting an End to Nigeria’s Generator Crisis: The Path Forward”, 2019. Access to Energy Institute. 4 Ibid. 5 Nigeria Energy Transition Plan unveiled at the COP26. 6 Nigeria’s NDC Update submitted in May 2021. 7 Nigerian National Petroleum Corporation, 2021. 8 Access to Energy Institute, 2019. 9 FGN- Power Sector Recovery Program 2017-2021, Jan 2018- http://mypower.ng/wp-content/uploads/2018/02/PSRP-Master-Document- January-2018.pdf. 10 https://www.enterprisesurveys.org/en/data. 11 Based on WB team analysis of power sector in Lagos State. 12 Exchange rate is assumed to be the official rate of - N422 (August 2022) and cost reflective tariff data is calculated from NERC models that put the cost reflective tariff at N52/kwh. Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 3 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 1.2  After privatization in 2013 and resells it to DISCOs. The transition from a publicly- before 2021, tariff regulation and market owned to a largely privately-owned power sector did contracts were not fully enforced and not bring the expected performance and service quality policy direction was inconsistent, creating outcomes. Government ministries and agencies, the a permanent crisis Nigeria Electricity Regulatory Commission (NERC), and the private sector have all fallen short of their Nigeria’s power sector is unbundled and since 2013 expected contributions to the sector’s turnaround. has been largely privately owned, but the transition did not produce the expected results. After the Inconsistent application of tariff policy made Electric Power Sector Reform Act was passed in 2004, sustainable electricity operations difficult. Although the sector was unbundled into six generation companies sector regulator NERC periodically issued Multi- (GENCOs), eleven distribution companies (DISCOs), Year Tariff Orders (MYTOs14) they were not actively and the Transmission Company of Nigeria (TCN). enforced, until 2021, with frequent delays often due to By 2013 the DISCOs and GENCOs had all been external factors like litigation and political interference. privatized. Three of the five thermal GENCOs, which This delay caused the financial situation of sector use natural gas as fuel, were sold in their entirety to new companies, especially DISCOs, to deteriorate and left owners, and three hydro GENCOs were transferred to NERC unable to enforce the contractual obligations private operators through concession contracts. TCN of the privately-owned GENCOs and DISCOs. There is still a government-owned monopoly. In the current is also a lack of clarity about how to reduce losses and stage of market development, known as the Transitional meet the capital expenditure targets specified in the Market,13 the government-owned Nigerian Bulk Performance Agreements between DISCOs and the Electricity Trading Company (NBET) fulfills the role Bureau of Public Enterprises (BPE), which are used to of bulk trader. NBET buys electricity from GENCOs, determine the tariff levels. including independent power producers (IPPs), and FIGURE 1.2. The power sector is unbundled and largely privately owned Electricity grid Sector State owned Transmission Company (TCN) 11.8 million Grid unbundled into customers in 6 Generation Government-owned Nigerian Bulk 2020. companies Electricity Trading Company (NBET) Distribution (GENCOs) fulfills the role of bulk trader. sector is Hydro (33%) privatized and Gas (67%) - includes based 11 DISCOs generation mix. divided geographically NBET buys electricity from GENCOs, including Independent Power Producers (IPP), under Power Purchase Agreements (PPAs) and resells it to DISCOs under Vesting Contracts. Thickness of the curved bars indicate volume of energy (GWh) flowing Source: World Bank, 2020. 13 This is an intermediate step consisting of a bulk buyer (to interface between GENCOs and DISCOs) envisaged ass leading ultimately to a fully functioning willing-buyer (DISCO) and willing-seller (GENCO) with no intermediary. 14 The MYTO methodology followed in Nigeria uses an incentive-based regulation that seeks to reward performance above certain benchmarks. 4 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE The distribution segment was struggling with lack of payment discipline by DISCOs and inadequate exceptionally high losses and low collections. In contractual enforcement of those payments by NBET 2020, 7 years after privatization, the sector’s aggregate and NERC, resulted in low remittances to NBET by the technical, commercial, and collection (ATC&C) losses DISCOs (BOX 1.1). were extremely high, with DISCOs reporting on average 50 percent, versus 26 percent allowed by NERC in Lack of cost-reflective tariffs since 2012 and low the tariff policy. These high losses were exacerbated by remittances of DISCOs to NBET forced the FGN to inadequate metering of end-use customers and the intervene and cover the shortfall—a significant fiscal failure of many ministries, departments, and agencies burden. The FGN is responsible for funding the tariff (MDAs) of federal, state and local governments to pay shortfalls, which are the difference between allowed and their electricity bills. The high losses, coupled with cost-reflective tariffs. In 2012–2019, the tariff shortfall FIGURE 1.3. In 2020, the power sector had to deal with five different types of problems Comprehensive measures to move Nigeria’s power sector forward sustainably are needed Infrastructure Policy and Regulatory Environment NGA in 2020: The capex NGA in 2020: Tariff allowance for all 11 DISCOS regulation and all market combined was 56 billion contracts not enforced since (USD 155 million), far below privatization (2013) and what is needed policy direction inconsistent Operational Inefficiency Sustainable Fiscal Support Environmental Sustainability NGA in 2020: DISCOs on NGA in 2020: FGN NGA in 2020: Energy sector average report 50 percent spending USD 1.5 billion per largest producer of GHG of ATC&C losses, far above year to fund tariff shortfalls emissions with estimated 22 what is allowed in their that could rise to more than million gasoline gensets performance agreements. USD 2 billion per year powering houses & MSMEs Source: Authors’ own elaboration based on World Bank, 2020. FIGURE 1.4. The FGN has had to step in to cover shortfalls and let the energy flow Annual tariff shortfalls (difference between allowed and cost- Remittance gap (Includes both tariff and nontariff shortfalls) reflective tariffs) Cost reflective tariff, N/Kwh N billion 60 107 54.5 In 2020 ,the DISCOs could not pay for 98 731 100 70% of the energy they bought, a sum 50.4 Tariff policy did not of N511 billion. The NBET billed the 90 allow tariffs to be 90 84 50 47.5 DISCOs N731 billion but received only cost-effective. 80 N220 billion. 59 The FGN is responsible 23.8 for funding the tariff 70 63 65 40 16.7 19.7 gap. 58 69 70 60 49 56 52 { 48 50 30 37 43 47 40 27 41 49 30 40 34 48 20 20 25 36 34 Average allowed 29 30 30.8 30.7 30.7 tariff (N/Kwh) 10 20 18 8 12 9 0 3 4 10 s t no a u n o a n a s la ur Jo O un ug ni Ek uj da ej Yo Ka co C Be Ab Ik d En a IS ar Ka Ib lD 0 H rt Al Po 2017 2018 2019 J Remittance J Gap J Remittance J Gap Source: Nigerian Electricity Supply Industry (NESI) data, NERC. Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 5 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 BOX 1.1. Understanding operational inefficiencies and their impact Operational inefficiencies in the sector could be numerous. To understand their extent and the impact they could have on sector finances, it is helpful to travel along the supply chain using 2020 data from NERC: Generation: N  igeria has about 12,500 MW of installed capacity, dominated by natural gas (88 percent) with hydro making up the rest. However, just over 51 percent of this capacity was not available in 2020 due to maintenance and repair work. Of the 6,158 MW available during the year, an average of just 4,087 MW was actually used for generation, because of both insufficient gas supply, transmission and distribution constraints, and the inability of DISCOs to purchase power. As a result, in 2020 only 33 percent of installed capacity was used. Transmission and Distribution:  The 4,087 MW of generation capacity available was used to generate 32,181 gigawatt hours (GWh) of electricity. This was sent to DISCOs, which received just under 30,000 GWh—a transmission loss of 7 percent, about 3 percent above benchmarks. Distribution network losses are also quite high. The DISCOs delivered only 75 percent of the electricity they received, losing 7,656 GWh to poor infrastructure and theft. In all 32 percent of electricity is lost during transmission and distribution. Retail: D ISCOs could bill 22,163 GWh of electricity to their customers (60 percent of whom are not metered). This should have ideally generated N816 billion in revenue for the DISCOs, but they were unable to collect only 33 percent of these revenues leading to collection of only N542 billion in 2020. Thus, inefficiencies in the distribution sector contribute a significant portion of the 50 percent aggregated technical, commercial and collection (ATC&C) losses. FIGURE B1.1. From generation to retail: Inefficiencies in Nigeria’s power sector In 2020, from a total installed capacity of about 12,500 MW, DISCOs received 29,819 GWh but managed to deliver only DISCOs billed N816 billion but only 4,087 was available for generation on average—a loss 22,163 GWh to end users, 25 percent was lost due to theft managed to collect only N542 billion, of about 67 percent and poor infrastructure losing 33 percent of revenues 13,000 12,500 35,000 Transmission losses 900 -51% are around 7 percent Hydro 2,362 -33% 11,000 30,000 -25% 700 7,656 274 6,341 25,000 9,000 20,000 500 7,000 Thermal (gas) -67% 32,181 816 15,000 29,819 5,000 2,071 Revenue 22,163 300 542 10,000 6,158 generation 3,000 Electricity 4,087 5,000 100 1,000 0 ci ed pa lab on ci le pa ion on tio e ou nt ss ce e CO es n lle y s cy n ct ue bi erg g ra rag ss io en io pa lab ty ci le ty ci al n t iv rgy d ed se lo llin pa all cavai N ca at N lle en lo but ci ct re en IS ty ge A ty ed n ne ve TX canst ca ai effi lle y co ev bi D le g tri Av in Co er R al I is ta er En t a D To To op MW GWh N billion Source: NESI data, NERC. 6 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE widened significantly because allowed tariffs stayed flat late 202015, every Nigerian who received electricity but cost-reflective tariffs shot up due to foreign exchange from a DISCO paid less16 for electricity than the cost depreciation and domestic inflation. The cumulative of supplying it. However, 80 percent of the spending shortfalls for 2015–19 were an estimated N1,678 billion on tariff shortfalls benefited the richest 40 percent of (US$6.0 billion). To ensure that the GENCOs and the population; only 8 percent benefited the bottom gas suppliers received enough payments to continue 40 percent, and of this less than 2 percent benefited generating electricity, since 2017 the FGN paid the the poorest 20 percent. In general, significant resources sector a total of N1,301 billion (US$4.2 billion). In spent on funding tariff shortfalls from 2012-late 2020 2019 total annual FGN support reached N524 billion disproportionately benefited the relatively wealthy (US$1.7 billion), 0.4 percent of GDP—higher than the who had access to the grid and used more electricity. N428 billion budget for health and just 20 percent less Consequently, a big chunk of government support went than the N650 billion budgeted for education in the to those who did not really need help with paying bills. same year. The need to turn the power sector around has long been recognized by all parties—the government, 1.3  The government funding to the sector the electric supply industry, the private sector, and to cover the tariff shortfalls did not benefit international partners—as one of Nigeria’s most the poor critical development priorities. It was recognized that the cost of inaction was very high. At the start of 2020, The FGN wanted to keep electricity tariffs low to it was estimated that if the sector continued its current protect the economically disadvantaged, but most performance and tariffs stayed not only flat but far below of the benefits went to the relatively wealthy. Before cost-recovery, through 2023 the FGN would have had FIGURE 1.5. Keeping tariffs low benefits the rich more than the poor Distribution of government spending to meet the tariff shortfall Percent of population Percent of population Who is connected to the grid? Who gets the higher benefit? Only 22% of the poorest households have access to electricity. Fort every N10 the government spends on meeting the tariff shortfall, N8 goes to the richer households who don’t need help paying their bills. 100 100 90 90 82.1 80 75.3 80 70 70 57.4 58.6 60 60 50 50 39.7 40 40 30 30 25.3 22.3 20 20 9.1 10 10 5.6 1.6 0 0 Poorest 20% 2 3 4 Richest 20% Poorest 20% 2 3 4 Richest 20% Population quintiles, based on per capita expenditure Population quintiles, based on per capita expenditure Source: World Bank, 2020. 15 Service-based tariffs were introduced on November 1, 2020 – see below. 16 This excludes the amount spent by consumers on gasoline, gensets, solar and other alternatives to augment the unreliable supply. Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 7 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 to provide another N3.082 trillion17 (US$7.94 billion) Efforts have also been made to improve reliability of in regressive subsidies that benefit mainly the wealthiest electricity supply but the progress has been relatively consumers. And this massive spending would not have slow. The poor financial situation of the DISCOs, bought any improvements in service quality. Apart coupled with their highly leveraged balance sheets, has from taking money away from other important social severely constrained their ability to access commercial development efforts, the power sector itself would have financing. In direct response to this liquidity challenge continued being a serious barrier to economic growth and to specifically address the ability of DISCOs to take and a threat to fiscal sustainability. in more power supply, the CBN is providing US$250 million for the rehabilitation of the transmission- Important governance changes have been affected in distribution interfaces, and the Siemens Presidential the sector to enforce better payment discipline. Lack Power Initiative (PPI) intends to bring an additional of payment discipline in the sector was a big concern US$2 billion to the transmission and distribution at the beginning of the reforms. Historic shortfalls that sectors. Programs such as the National Mass Metering still exist are financed sustainably through the FGN’s Program (NMMP) aim to increase metering significantly PSRP Financing Plan developed annually. DISCOs to help DISCOs increase their billing transparency and were paying NBET, on average, only 29 percent of their collection efficiency. As of March 2022, the metering invoice in 2019 causing a further cascade of payment programs have added 1.5mn connections20 since 2019. breakdown in the system—NBET was able to pay on Additionally, all DISCOs have developed Performance average only 26 percent of the GENCO invoices. Under Improvement Plans (PIPs), aimed at improving the the PSRP, the CBN established and operationalized distribution infrastructure in each DISCO’s franchise a waterfall payment management system18—that area for better service delivery, with NERC monitoring prioritizes payments through an escrow account and the progress on their implementation. Timely adherence assures minimum payments to all participants in the to PIPs will improve the technical and financial power sector value chain- to ensure that DISCOs were performance, and the governance, of DISCOs, meeting their minimum remittance requirements to reducing ATC&C losses, increasing collection rates, NBET and the Market Operator (MO). In 2021, and connecting more customers to the grid. This will DISCOs managed to pay 81 percent of the NBET eventually enable the sector to end FGN assistance and invoices while the latter paid 71 percent of its GENCO fill its investment needs by accessing private financing. invoices, showing an appreciable improvement19. There is enhanced monitoring of DISCO’s monthly The FGN has also taken some critical actions to put sales and revenues by NERC for accurate Minimum the country on the path toward universal access. Both Remittance Order (MRO) adjustments to ensure they grid-extension and off-grid solutions will be needed reflect the latest conditions. However, continued poor to provide timely quality services to unserved and bill collection and operational inefficiencies, including underserved households and businesses, especially as excessive network losses continue to drive financial the country recovers from the impact of the COVID-19 underperformance. pandemic. The Nigeria Electrification Project 17 This analysis/scenario assumes no action on part of FGN in addressing tariff shortfalls. In reality, FGN did move in 2020 to narrow tariff shortfalls. 18 The CBN waterfall payment mechanism is meant to be an effective payment securitization framework (especially in the absence of additional payment guarantees from Discos) to provide assurance for all market participants in the electricity value chain. It is based on the Escrowed NESI market funds and disbursed by CBN to market participants based on the balances on the Principal Collection Account of Discos and guided by the Discos' Account Administration and Payment Waterfall (DAAPW) which defines the payment priority levels. This is expected to provide visibility and certainty of market payments to market participants and gas suppliers, thereby envisaged to ensure certainty and stability in electricity supply and subsequently provide the route part towards administration of partial contract activation in NESI. 19 NERC 2021, Key Operational & Financial Data of NESI for January 2019 to September 2021. 20 NERC 2021, Key Operational & Financial Data of NESI for January 2019 to September 2021. 8 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE NEP which is World Bank funded which focus on to continue preparing a Financial Plan for the sector. underserved rural populations and rural institutions. The While tariff shortfalls have been almost eliminated, program has so far connected over 320,000 households revenue (or Market) shortfalls are now the single biggest and 2500 MSMEs. The Rural Electrification Agency factor impacting the financial sustainability of the power (REA) has since established the Rural Electrification sector. Reducing DISCO losses, currently at more Fund. Additionally, the FGN launched the Solar Power than twice the allowed level under the MYTO regime, Naija initiative in April 2021 which aims to roll out 5 is critical to manage revenue shortfalls that are driving million solar connections in communities that are not the sector’s current financial issues. There is an urgent connected to the grid. need to implement the DISCO and TCN PIPs for sector sustainability. The sector also needs to continue While PSRP has brought significant improvements increasing overall accountability and transparency to in the sustainability and regulation of the sector, build trust among various stakeholders by making more operational efficiency and reinforcement of data publicly available. Achieving Nigeria’s ambition infrastructures lag behind. Insufficient investment to be a net zero economy will require putting in place in transmission has curtailed the network’s capacity enabling policy and regulatory environment as well as to transport power, contributing to the fact that only significant crowd-in of private investment. It will be 51 percent of the installed capacity is usable. While critical for Nigeria to institutionalize sector planning and the situation improved in 2021 with the average develop a Least Cost Power Development Plan (LCPDP) electricity sent out to the grid reaching 4.1 GWh with a long-term horizon, shaped by the national compared to 3.7GWh in 2019, this is still woefully context, to serve as the basis for prioritizing energy sector short of the demand21. In 2022, the network has again investments. Given the historical context of the private seen several total collapses. Some of the bottlenecks investment in the power sector, the FGN will have to affecting the ability of the transmission to evacuate demonstrate its ability to improve sector finances further available generation capacity is inadequate, aging and and its willingness to adhere to contractual obligations poorly maintained transmission network. Much of with the private sector. the grid is underused and the transmission capacity in high-demand areas is inadequate. At the same time mismatches between supply and demand can be addressed with integrated resource planning coordinated by the regulator. There is also a need to digitize the network as the Supervisory Control and Data Acquisition (SCADA) system monitors only a section of the 330KV transmission lines and substations. The PSRP has had a transformative effect on the financial performance and viability of the power sector in Nigeria, but a lot more needs to be done to make the power sector drive the Nigerian economy forward. To get to a financially and fiscally sustainable power sector NERC will need to continue to undertake regular MYTO reviews and the government will need 21 NERC 2021, Key Operational & Financial Data of NESI for January 2019 to September 2021. Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 9 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options Why Reforms Are What Impact these Which Reforms Are Critical Status Needed Reforms Could Have Strengthening the Policy and Regulatory Environment • One of the biggest • Carry out an extraordinary tariff review for • DISCO payment challenges in the all DISCOs and issue new MYTOs to set the discipline is sector is inadequate revenue requirements for these companies for strengthened and enforcement of sector 2022–25.  enforced. contracts. Delays in Who: NERC • Regulatory conditions issuance of MYTOs are predictable and on tariff reviews and • Include in revenue requirements allowances defined through 2025. effective application for capital and operating expenditures and of their outcomes • The investment estimated total aggregated technical and climate improves. hurt the sector. commercial losses in supply, based on Performance targets Performance Improvement Plans (PIPs)  for DISCOs under approved by the Regulator. current MYTOs fall Who: NERC short. • Sector institutions fully commit to adhere effectively to sector contracts and regulations. Who: NERC, TCN, NBET, FGN  • Improve the investment climate, including economic procurement of generation capacity pursuant to a Least Cost Development Plan (LCDP) and clarification of the monetary and fiscal policies that provide incentives for private  investments in the power sector. Who: FGN Achieving Fiscal and Financial Sustainability • The FGN cannot • Move toward full cost recovery with • Tariff shortfalls are afford new tariff tariff adjustments through new MYTOs, fully funded and shortfalls annually. accompanied by measures to protect the poor gradually reduced to DISCOs do not pay and enforce payment discipline.  zero. up to 53 percent Who: NERC • The fiscal burden of of their invoices to the power sector on NBET. • Implement the PSRP Financing Plan to fully the FGN is reduced. fund new tariff shortfalls and clear historical • The financial situation arrears with sustainable sources of funds. of DISCOs improves Who: FGN (Federal Ministry of Finance, Budget  as tariffs come to and National Planning - Budget Office of the better reflect current Federation) conditions and the costs of efficient • Develop a framework to monitor and account service delivery. for market shortfalls so they can be reduced consistently. The market shortfalls need to be fully funded based on accountability framework.  Who: FMFBNP  Implemented    Under implementation    Not implemented 10 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (continued) Why Reforms Are What Impact these Which Reforms Are Critical Status Needed Reforms Could Have Improving Operational Efficiency • Operational  ddress constraints in the transmission and A • Minimum supply inefficiencies in the distribution segments and maintenance issues in necessary for grid system result in generation. stability is achieved. massive financial as • Implement PIPs22 approved by NERC in • The distribution well as economic losses. There is an late April 2021, to be reflected in MYTOs of extraordinary review for 2022–25.  network is increasingly reliable. immediate need to ensure that the Who: DISCOs • Operations in all transmission and business areas of • Systematically oversee DISCO performance DISCOs are efficient, distribution networks after MYTOs are issued, and adopt corrective receive at least the transparent, and action (including license revocation) when accountable. minimum level of supply that allows DISCOs fail to adhere to PIPs and deliver on MYTO provisions.  • Investor confidence the grid stability and increases as DISCOs reduction of system Who: NERC emerge as credible outages. commercial partners. • Follow corporate governance and transparency best practices. • Sector credibility and Who: DISCOs  investor confidence both increase. • Increase accountability and transparency: Ì Timely publish financial statements of DISCOs audited according to International Financial Reporting Standards.  Who: DISCOs Ì Publish key operational and financial performance data of the sector every quarter  Who: NERC • Identify bottlenecks in the Disco-TCN interface and provide investment for critical projects Who: TCN   Implemented    Under implementation    Not implemented 22 DISCOs prepared PIPs based on guidelines issued by NERC in 2019 that could incorporate tools (information systems, revenue protection programs, etc.) to improve efficiency and enhance transparency and accountability in operations Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 11 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (continued) Why Reforms Are What Impact these Which Reforms Are Critical Status Needed Reforms Could Have Expand and Improve Infrastructure • Substandard  efine technical and operational interventions D • ATC&C losses are infrastructure is a required to turn-around operations. reduced from an major factor in sector • Identify the capital investments required to do unsustainable 50 inefficiencies. There percent. is an urgent need to so in the PIPs. Who: DISCOs  • Quality of service improve and expand improves the network to • To close the metering gap, effectively improve the quality of • Better collection implement programs for metering of customers. supply. Who: DISCOs  increases revenues • Increase i transfer • Poor access to electricity severely capacity of the • Tackle electricity theft and bill collection to transmission network. impacts the economic reduce the critically high ATC&C losses. prospects of all Who: DISCOs  • Dispatch least-cost generation and Nigerians. About 43 percent (85 million enhance regional • Upgrade, rehabilitate, and reinforce trade to optimize people) of the transmission lines. population has no access to electricity Who: TCN  costs. • Increase access. • Prepare a comprehensive electrification master plan that looks at achieving the access goals while also pushing Nigeria towards its ambitious ETP targets. The plan should be based on long-term demand forecast and informed by the Integrated Resource Plan (IRP) as well as the low carbon Least Cost Power Development Plan. Adopt a dual strategy to expand access to  electricity service that involves off-grid access solutions, such as mini grids and solar home systems Who: FGN, REA  Implemented    Under implementation    Not implemented 12 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (continued) Why Reforms Are What Impact these Which Reforms Are Critical Status Needed Reforms Could Have Clean Energy Transition • Nigeria has ambitions S  hort and Medium Term • Renewables comprise to be a zero net • Create enabling regulatory and policy for a larger share of the emission economy unlocking Distributed Photovoltaic (DPV) solar generation mix and by 2060. The energy sector is the largest market  help achieve net zero emission ambition contributor to GHG Who: NERC, FGN, State Governments, CBN, DFIs • GHG emissions from emissions. To achieve the power sector are net zero ambition • Identify innovative-use cases and business reduced. Nigeria needs to add models for scaling up DPV • Generation and 5GW of solar` Who: Private sector, DFIs, FGN, state  transmission governments expansion is done at a least cost basis. Long Term • Build institutional capacity for long term planning in the sector. Prepare a Least Cost Power Development Plan (LCPDP) in accordance with FGN policies to systematize  generation and transmission expansion Who: FGN, TCN, DISCOs • Define enabling conditions for development of large-scale grid connected solar projects Who: NERC, FGN, DISCOs, GENCOs   Implemented    Under implementation    Not implemented Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector 13 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 References Access to Energy Institute, 2019. “Putting an End to Nigeria’s Generator Crisis: The Path Forward.” Federal Government of Nigeria, 2018. Power Sector Recovery Programme 2017–21. IEA, IRENA, UNSD, World Bank, WHO. 2022. Tracking SDG 7: The Energy Progress Report. World Bank, Washington DC. World Bank 2020, Programme Appraisal Document, Power Sector Recovery Operation. Washington DC. NERC 2021, Key Operational & Financial Data of NESI. 14 Note 1: Igniting Economic Growth by Reforming Nigeria’s Power Sector Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification Authors: Jakob Engel, Aleksandar Stojanov, Jonathan Lain, Bob Rijkers, Erhan Artuc, Guido Porto, Guillermo Falcone, Federico Ganz, and Mohammed Isa Shuaibu NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification Summary: Trade and investment have been key drivers 2.1  Increasing and diversifying exports of global growth and poverty reduction over the past 30 and FDI is central to advancing Nigeria’s years. The increased participation of firms in developing industrialization and development countries in regional and global value chains has objectives contributed significantly to job and wealth creation. However, in Nigeria there is still widespread skepticism Increased trade and investment can play an essential about the benefits of export-led growth and increased role in fostering economic development and poverty trade integration. Although economic diversification is reduction(Coulibaly et al., 2022). Trade has historically a longstanding policy aim, Nigeria’s efforts to achieve it made a significant contribution to prosperity by have largely remained unsuccessful: oil still makes up over supporting the creation of new, higher-paying jobs and 90 percent of exports. Nigeria’s trade policy has moved increasing the efficiency of firms, as well as by providing in a heavily protectionist direction, with an escalation consumers with cheaper and better products. Across of import restrictions through higher tariffs and levies, countries, a 1-percentage-point increase in the trade-to- import bans, foreign exchange limitations, and border GDP ratio increases per-capita incomes by 0.5 percent closures. Although these measures were intended to (Feyrer, 2019). In the context of the COVID-19 support the country’s industrialization and security goals, pandemic, trade has played a crucial role in providing they have had numerous unintended consequences. First, access to essential food and medical supplies, and in the import restrictions result in high levels of tariff evasion, production and distribution of vaccines. Trade remains and thus a loss in revenue estimated at 0.4 percent of vital to sustaining global economic recovery from the GDP, or US$1.8 billion, annually. Second, these policies pandemic and limiting the negative impacts on jobs and also adversely affect poverty by raising consumer prices. poverty. Third, they inhibit the efficiency of domestic firms by raising the cost of their production inputs, thereby Nigeria's export performance is volatile and has constraining their competitiveness and limiting their showed a tendency to decline over recent years, given potential to export to regional and global markets. its continued overdependence on oil. Nigeria remains However, Nigeria should not miss this critical time to one of the world’s least diversified countries. About take advantage of the continental momentum behind 90 percent of exports are concentrated in oil, and the greater integration, and to nurture the potential and country’s remaining exports are mostly basic agricultural dynamism of a growing number of highly innovative goods that add little value (FIGURE 2.1). entrepreneurs and firms. A new approach to trade policy in Nigeria should focus on: (i) reviewing trade policy to The combined shocks from the oil price collapse and safeguard revenues, reduce poverty and support domestic then the COVID-19 crisis in 2020 magnified the firms; (ii) reducing domestic and international trade and already high cyclicality and weak ability to create transport costs: and (iii) creating an appropriate policy jobs of Nigeria’s private sector. These shocks were and institutional infrastructure that supports Nigeria’s further exacerbated by the 16-month-long closure of trade and industrialization priorities. Nigeria’s land borders, from August 2019 until their 16 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE partial reopening in January 2021. Nigeria has yet For Nigeria to become more productive and support to fully implement the protocols of the Economic the integration of firms into regional and global value Community of West African States (ECOWAS) Free chains, significant reforms are needed. Successful Trade Area, although ongoing negotiations to participate integration into the regional and global economy in the African Continental Free Trade Area could open depends on firms being able to count on four premises: new opportunities for the private sector. Thus, there (i) the existence of opportunities to enter and invest are significant potential gains to be made from gradual, in new markets; (ii) access to efficient input markets ongoing efforts toward greater African integration. abroad; (iii) the ability to compete on a level playing field; and (iv) the capacity to expand and thrive in global Foreign direct investment (FDI) inflows have markets (Licettie et al., 2018). These conditions, laid also been lagging comparators and have declined out in FIGURE 2.3, can in turn benefit market and in recent years. Nigeria’s FDI inflows as a share of productivity dynamics through knowledge spillovers GDP have fallen from over 2 percent a decade ago to from FDI, reduced market distortions, the reallocation of less than 1 percent in recent years (FIGURE 2.2). resources toward more-productive firms, and incentives Certain comparator countries, such as Ghana, have to invest in new technologies. The combination of these consistently seen FDI inflows in excess of 6 percent of factors would result in better jobs and higher consumer GDP. FDI goes hand-in-hand with trade and is also a welfare. critical ingredient to economic growth, contributing to increased productivity, innovation, and technology The recent growth trajectories of the processed food transfer. FDI supports the diversification of the economy and creative services industries show the potential and helps domestic firms become more competitive and for Nigerian firms to become successful exporters. export more. Increasing participation in regional and There have been significant increases in the production global value chains by enabling access to intermediate and export of packaged food products, driven in goods, attracting strategic FDI, and building capabilities part by large-scale investments by international firms in key industries can help drive industrialization and such as Olam. The creative industries—most notably support structural transformation of the economy. film production—have been a source of dynamism, FIGURE 2.1. Extractives exports have dominated FIGURE 2.2. FDI inflows as a share of GDP over the past decades (percent) have been low and declining Exports by sectors FDI inflows as a share of GDP in Nigeria is relatively low US$ billion Percent 120 3.5 100 3.0 2.5 80 2.0 60 1.5 40 1.0 20 0.5 0 0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Agriculture J Manufacturing J Minerals ▬ Nigeria ▬ LMICs ▬ SSA Source: World Bank calculations based on WITS. Source: World Bank calculations based on WDI. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 17 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022  ssential conditions for increasing Nigeria’s gains from more trade and investment FIGURE 2.3. E Ÿ Appropriate levels of access to domestic markets 1. Accessing opportunities and adequate customs procedures. to enter and/or invest in new markets. Ÿ Suitable investor entry and investment regimes, investment promotion policies and capacities. 2. Access to efficient input Ÿ Address excessive import tariffs, NTMs, and markets through cheap, other restrictions. varied, and high-quality inputs and services. Ÿ Create a conducive environment for linkages with local suppliers. 3. Ensuring the ability to compete on a level Ÿ Introduce competition policies that ensure non- playing field. discriminatory access and reduce distortions. Ÿ Export taxes and border 4. Capacity to thrive in management. regional and global Ÿ Investor protection, markets. grievance management, and aftercare. Source: Adapted from Licetti et al., 2018. contributing 2.3 percent to Nigeria’s GDP in 2021.23 2.1.1  Nigeria remains one of the world’s The creative industries can also help countries increase least diversified economies their capacity for more complex tasks related to intellectual property management and licensing. Trade diversification has been a leading policy objective for the FGN since independence, but Nigeria has ample room to harness the development this goal has remained elusive. Nigeria is one of the potential of increased trade and investment, but its world’s least diversified economies, behind only Angola recent trade performance is limited by four features, (FIGURE 2.4). The country’s exports are concentrated together with import restrictions. Four characteristics in the highly capital-intensive oil sector, creating few limit Nigeria’s trade performance. First, the country direct jobs, while upstream and downstream linkages remains one of the world’s least diversified economies. remain limited. In recent years, the combined share of Second, Nigeria exports relatively little to the rest of agriculture and manufacturing exports has consistently Africa, as oil exports are primarily directed outside the remained under 15 percent. In part, this is because continent. Third, FDI has been declining. Fourth, high certain agricultural exports are not sold through formal trade and transport costs, and delays at borders and channels, and thus do not contribute to recorded ports, are major impediments to export growth. The exports. Nonetheless, the level of concentration of second major barrier to increased trade and investment Nigeria’s exports far exceeds that of its comparators.24 are import restrictions, which undermine the country’s This is also reflected in Nigeria’s export market share: wider development goals. while the country’s global market share in oil was about 1.5 percent as of 2020 (a decline from 3 percent in 2010), its global share of non-oil exports was only 0.02 percent. 23 See article: https://www.premiumtimesng.com/news/more-news/455597-nollywood-contributes-2-3-to-nigerias-gdp-gbajabiamila.html. 24 A widely used measure of economic concentration or diversification is the Herfindahl-Hirschman Index (HHI), which measures how diversified or concentrated a country’s exports or imports are. Countries with an HHI close to zero are most diversified, while those with an HHI score close to one have exports highly concentrated in one sector. Nigeria’s exports are among the most concentrated relative to peers with an HHI of 0.79 in 2019. The HHI of the nearest comparator, Algeria, is 0.47 and the average value for SSA countries is 0.30. 18 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 2.4. Nigeria has the least-diversified economy in the world apart from Angola Herfindahl-Hirschman Product Concentration (Diversification) Index: Nigeria vs Peers 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 ru a a ia re n na ria ia la o a a a il ia t a ia l a ga yp az ic si di ric ny bi si nd oo s an op go er Pe oi ha ge us ex ne ay In Eg ne om Br Af Ke ga Iv er ig nz hi An G Al M al R do Se d' am Et N ol h U Ta M ut e C In C ot So C J 2008 J 2017 Source: Based on UN Comtrade (via WITS). Moreover, the dominance of mineral and fuel exports FIGURE 2.5. The dominance of mineral and fuel exports became stronger recently and has not has increased over the past 50 years. In the early changed significantly since the early 1970s 1970s, minerals and fuel comprised about 74.5 percent Mean share of M & F exports between 2017–2019 of Nigeria’s exports, but in the three years leading up 120 to the COVID-19 pandemic (2017–19) this share 100 increased to 92.4 percent (FIGURE 2.5). Several of NGA DZA Nigeria’s comparators, such as South Africa and Ghana, 80 similarly saw a growing share of mineral and fuel exports 60 relative to total exports over the past half century. However, Indonesia and Kenya—both major exporters 40 ZAF GHA of extractives—experienced a substantial decline of their EGY IDN 20 MYS IND shares thanks to the diversification of their export base. MEX KEN 0 0 20 40 60 80 In countries with highly concentrated export baskets, Mean share of M & F exports between 1970–1972 Source: World Bank calculations based on WITS-Comtrade. especially in minerals and fuels, diversification tends to be associated with higher growth.25 There is no magic formula for export diversification, but contrasts Nigeria’s experience with that of three Asian developing countries need to seize the momentum for countries—Indonesia, India, and Malaysia—that had a domestic reforms and implement them with a high similar focus on import substitution during the second level of political support. Diversification is impeded by half of the 20th century, but were then able to diversify. numerous factors, including high trade and transport All three countries trailed Nigeria in GDP per capita costs, a restrictive trade policy environment, and in 1980, but now far surpass it. Key drivers of change numerous constraints to the overall investment climate. included economic crises that created a window of These in turn contribute to the very limited participation opportunity for reforms, which entailed a focus on of Nigerian firms in regional and global value chains education and knowledge accumulation, as well as the (GVCs). A recent IMF analysis (Yao and Liu, 2021) gradual reduction of trade and investment barriers. 25 Developing countries tend to diversify at the extensive margin (number of products exported) rather than the intensive margin (volume of exports), however export growth takes place at the intensive margin Oil-producing countries experience export growth, while they show a rising gap in export diversification between oil-producing countries and the rest of the world (Ross, 2019). Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 19 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 As export diversification has stagnated, so Nigeria’s Nigeria’s terms of trade are mainly driven by oil trade openness, as measured by the overall share prices. However, the country’s trade balance has of trade of goods and services relative to GDP, has remained relatively even: import volumes follow the remained low. Given the centrality of oil exports, export trajectory of exports, resulting in a positive current growth has been highly volatile and subject to variations account balance in most years (FIGURE 2.8)— in oil prices. Total exports declined between 2012 and although this does not reflect the large volume of 2016 as oil prices went down, then increased in the informal imports that are smuggled in to evade import years leading up to the COVID-19 pandemic, again in restrictions.26 This dependence on oil exports also makes parallel with oil prices (FIGURE 2.6). In terms of the Nigeria vulnerable to price shocks. Following a dramatic overall share of trade to GDP, Nigeria lags most of its 23.7 percent decline in Nigeria’s terms of trade in 2016, comparators, although it is on a similar level as countries due to collapses in the oil price and production, terms of such as Indonesia, India, and Egypt (FIGURE 2.7). trade started to improve slightly in 2017 and 2018, but continued to depress the value of the country’s exports. FIGURE 2.6. Trade openness has declined over FIGURE 2.7. Nigeria’s trade as a share of GDP the years lagged most peer countries in 2019 Percent of GDP Percent Percent of GDP 30 50 140 40 120 25 30 100 20 80 20 10 60 15 0 40 -10 20 10 -20 0 a . a do a a a na o a ria e Ar me ep ic ric m ric di i si -30 si er ha ge ne ay ex In co co R 5 Af Af ig G Al al M ab in in N h n -40 M ut ra e In e dl dl So ha t, id id -50 yp Sa 0 m m Eg b- er er 08 09 10 11 12 13 14 15 16 17 18 19 20 Su w pp 20 20 20 20 20 20 20 20 20 20 20 20 20 Lo U J Exports J Imports ▬ Export growth, rhs J Goods exports J Service exports J Goods imports J Goods imports Source: World Bank calculations based on WDI. Source: World Bank calculations based on WDI. FIGURE 2.8. Imports follow the (oil) export FIGURE 2.9. Services exports have been trajectory increasing but significantly lag imports US$ billion US$ million 120 45,000 Oil prices dropped Oil prices dropped 40,000 100 35,000 80 30,000 60 25,000 40 20,000 15,000 20 10,000 0 5,000 -20 0 08 09 10 11 12 13 14 15 16 17 18 19 20 08 09 10 11 12 13 14 15 16 17 18 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Current account balance ▬ Exports ▬ Imports J Services exports J Services imports Source: World Bank calculations based on IMF BoP. Source: World Bank calculations based on UNCTAD. 26 On the export side, there are also large volumes of illegally exported oil that benefits from Nigeria’s generous PMS subsidy (World Bank, 2021). 20 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE They then further declined in 2019 and 2020. In 2015, exports has been driven by travel and “other services”, imports of goods and services were greater than exports which includes financial services, entertainment, for the first time since 2008. This happened again in information and communication technologies (ICT) 2020, as the oil price hit a new low. and other more complex, high-skill services. Services exports contribute a small but growing share Finally, although Nigeria’s competitiveness has stalled to total exports. While services exports remain low, they over time, even in areas of comparative advantage, have increased significantly, more than doubling between there are emerging sectors (in addition to services) 2008 and 2019 (FIGURE 2.9). In 2013, services exports with potential for growth and diversification, made up 2.5 percent of total exports. By 2019 this share especially in agribusiness. Based on product fitness—a had increased threefold to 7.5 percent. However, services measure that captures a country’s level of available exports make up about 40 percent of total exports in endowments and productive knowledge (also known certain comparator countries, such as Ghana and Egypt. as capabilities)—Nigeria ranked 148th out of 169 In Ghana, this is driven in particular by services exports countries in 2018, a drop of eight places since 2013 supporting the booming extractives sector (World Bank, (IFC, 2020). However, capabilities are emerging in new 2022b). downstream sectors with increased feasibility, including food preparations and packaged food products, Nigeria imports far more services than it exports. petrochemicals, and steel. Sesame, for example, is a In 2019, Nigeria’s services imports were eight times its product with promising growth potential and numerous exports in terms of value. The bulk of services exports downstream uses to meet domestic demand, and has been in travel and transport, while growth in services eventually international demand as well (BOX 2.1). BOX 2.1.The prospects of agricultural diversification through sesame Recent World Bank studies (2022a) have highlighted the growth potential of the sesame value chain. However, there are significant barriers to growth. The study builds on interviews with leading firms and experts, as well as an analysis of the market potential of these products in Nigeria. FIGURE B2.1. Nigeria’s share of world’s exports of sesame are growing Percent 35 30 25 20 15 10 5 0 -5 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 ▬ Sudan ▬ India ▬ Nigeria Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 21 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Box 2.1 continued Sesame seeds are Nigeria’s most-exported agricultural product, and the country is their third-largest exporter globally. However, Nigeria has the potential to double its exports of sesame seeds in the not-too- distant future. Northern Nigeria enjoys a comparative advantage for its production of high-quality, oil-rich seeds that are primarily exported to the demanding Japanese market, where they are processed into premium oil. Nigeria also exports “ready-to-eat” seeds to Europe and North America, as well as seeds for paste to the Middle East. The global market for sesame seed products is growing because of their nutritional and health benefits, compared with substitute products such as palm oil. This would also enable more than 300,000 poor farmers in the North to increase their sesame-related profits by more than 60 percent in five years thanks to increased exports. Measures necessary to enhance the competitiveness of key agricultural value chains include: 1. Building partnerships between seed institutes and leading firms to develop improved seeds. 2. Organizing extension services (including demonstration plots) to promote usage of fertilizers and seeds. 3. Creating Sanitary and Phytosanitary (SPS) certification capacity (as a public-private partnerships) for export crops. 4. States are to adopt safeguards to improve land allocation to large-scale farmers. This should entail model land leases with details of the acquisition process, as in Senegal and Ghana. 5. Addressing logistical issues in and around Lagos port causing 30-day delays, 8 percent extra cost, and 2 percent price discount on the export of sesame seeds. 6. Removing import duties on agricultural equipment (starting with export value chains such as sesame seeds). 7. Mitigating energy issues that add 2 percent in cost to processed products (sesame oil, cassava starch). 8. Removing foreign exchange (FX) restrictions on the import of fertilizers (starting with export crops such as sesame seeds) and committing to zero import tariffs on fertilizers (to avoid inverted tariffs). 2.1.2  Nigeria exports relatively little to the largest export destination, and a far larger share of rest of Africa Nigeria’s exports goes to the ECOWAS region. Compared with other large African countries, Nigeria Nigeria has committed to significant policy and exports relatively little to the rest of the continent. Its institutional reforms through the AfCFTA, but recorded intra-regional exports as a share of total exports implementation will be key. Nigeria is embarking are less than 10 percent, while almost one-quarter of on an ambitious course toward greater integration South Africa’s exports remain in Africa (FIGURE 2.10). and policy reforms. This is most evident through its In addition, non-oil exports also remain at low levels active participation in the African Continental Free and have declined since 2017 (FIGURE 2.11). Nigeria’s Trade Area (AfCFTA) negotiations, and its efforts to share of intra-regional trade within ECOWAS has also develop a domestic implementation plan. The AfCFTA’s been low (around 5 percent of Nigeria’s total recorded implementation—which will require substantial exports in 2020). The main reason for this trend is that preparation and engagement across the federal and Nigeria’s oil exports are primarily directed outside the state governments, the private sector, and other continent. India, Spain, and the Netherlands are the stakeholders—holds significant potential for private most significant export destinations overall. However, sector-led growth through regional integration. Nigeria considering exclusively non-oil exports, Ghana is the has also developed a new National Investment Policy, 22 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 2.10. Non-oil exports to Africa remain FIGURE 2.11. Nigeria’s oil and non-oil exports to relatively low and have been in decline since 2017 Africa are less than 10 percent of total exports US$ million US$ billion Share of total exports 4,500 4,186 120 14 4,000 100 12 3,500 10 3,000 80 2,500 8 60 2,000 6 1,500 40 4 1,000 667 20 2 500 0 0 0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 2 20 3 20 4 20 5 20 6 20 7 20 8 20 9 20 0 20 1 12 20 3 20 4 20 5 20 6 20 7 20 8 19 1 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ▬ Africa non-oil exports ▬ RoW non-oil exports J Africa total exports J RoW total exports ▬ Africa share of total exports Source: World Bank calculations based on WITS mirror exports. Source: World Bank calculations based on WITS mirror exports. and is in the process of developing a new Trade Strategy. with foreign firms. The vibrant entrepreneurial ecosystem Moreover, at the sub-national level, state governments in Nigeria29 would benefit from being connected to across the country are implementing ambitious business technological and process innovations, know-how, environment reforms. diaspora mentorship, and research and development. Nigeria signed the AfCFTA agreement in 2019 and Despite fears about their impact, any short-term ratified it in 2020. The country has been engaged revenue losses suffered by Nigeria because of tariff in all relevant negotiations and conducted nation- liberalization under the AfCFTA will be small wide stakeholder consultations,27 leading to numerous and distributed over a 10-year period(Arenas and institutional reforms.28 Moreover, the AfCFTA Vnukova, 2019). Annual revenue losses, distributed negotiations have catalyzed new domestic initiatives that over 10 years, would only account for a 0.236 annual may help implementation. percentage change in tariff revenues (or 0.148 percent of tax revenues) (TABLE 2.1). And based on the actual Further continental integration can help enhance liberalization timeline, most of the revenue impact the competitiveness of Nigeria’s manufacturing will only be felt after five years following the AfCFTA’s sector. By making manufacturing more competitive, implementation, when sensitive products will be Nigeria could leverage regional market integration to liberalized. The effect of the AfCFTA on Nigeria’s achieve economies of scale, lower costs, and boost its revenues will also be minimal because only 4.1 percent international competitiveness. Regional value chains of the country’s total imports come from Africa—one can, in turn, provide a stepping-stone toward GVCs. of the lowest shares on the continent. In the medium Increased competitiveness from regional integration can to longer term, increased GDP will generate larger fiscal lead to diversification of export products and markets, revenues on increased economic activity thanks to the and support private sector-led growth. In parallel, it will AfCFTA, which will likely outweigh any minor short- incentivize domestic producers to increasingly compete term revenue losses. 27 NOTN press-release: http://www.notn.gov.ng/post_action/64. 28 To coordinate the AfCFTA negotiations, in 2017 the FGN established the National Committee for the African Continental Free Trade Area (the AfCFTA National Committee) and the Nigerian Office for Trade Negotiations (NOTN), while the Enlarged National Focal Point on Trade (ENFP) facilitates stakeholder consultation and offers advice on trade policy. Inter-agency tensions have at times exacerbated negotiation challenges, as NOTN took over responsibilities previously held by the Department of Trade in the FMITI. In the case of the AfCFTA negotiations, it is widely agreed that stakeholder consultations could have been more extensive. 29 GEM: https://www.gemconsortium.org/country-profile/93. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 23 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 TABLE 2.1. Estimated revenue losses under AfCFTA trade liberalization scenario16 foreign-exchange gap, but it can also enhance access to Percentage change, new technology, markets, managerial skills, inputs, and annually over 10 years products. FDI in manufacturing and efficiency-seeking As percent of tariff revenues -0.236 sectors can help promote export diversification, enable As percent of tax revenue -0.148 domestic firms to integrate into regional and global value As percent of total -0.044 chains, stimulate productivity, and make firms more government revenue Source: Arenas and Vnukova, 2019. likely to export. In the long run, trade and welfare gains increase Nigeria has experienced a steady decline in FDI over substantially in response to reforms introduced recent years. Nigeria’s FDI inflows have been low and in by trade agreements, such as trade facilitation, the decline since 2009, despite the country’s sustained efforts elimination of non-tariff measures (NTMs), and to improve its business environment. Among external (Vanzetti et al., 2018). The small services liberalization  flows, FDI is now dwarfed by remittance inflows, and revenue impact from tariff liberalization is also likely comparable to overseas development aid (FIGURE to be compensated by additional tax revenues from 2.12). Equity inflows account for the largest share of increased economic activity. However, the FGN will FDI inflows (FIGURE 2.13). need to support those workers who may lose out from adjustments deriving from increased openness. The overall decrease in FDI has been partly driven by the decline of inflows in primary sectors, particularly mining and oil and gas. In recent years, the largest 2.1.3  Foreign investment has been share of Nigeria’s FDI has gone to the services sector, declining as business environment potentially indicating greater diversification away reforms tapered off from extractives. Between 2009 and 2019, FDI in services made up 50.3 percent of all inflows, followed In light of weak domestic private sector investment, by manufacturing (28.4 percent) and extractives FDI is key to enabling Nigeria’s economic growth (21.0 percent). Investment in natural resources is mostly and diversification. Not only can FDI help to close the driven by international commodity prices and typically FIGURE 2.12. Remittances have become more FIGURE 2.13. Equity holdings make up the largest significant as FDI has declined share of inflows Percent of GDP USD million, nominal 9 10,000 8 9,000 7 8,000 7,000 6 6,000 5 5,000 4 4,000 3 3,000 2 2,000 1 1,000 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 J FDI inflows J Remittances J ODA received J Reinvested earnings J Equity other than reinvested earnings J Intra-company loans Source: World Bank calculations based on WDI. Source: World Bank calculations based on WDI. 30 The scenario that has been agreed for liberalization under the AfCFTA: tariffs removed on 97 percent of lines that account for at least 90 percent of intra-regional imports (sensitive products). 24 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE undertaken by large multinational corporations, Mjekiqi, 2009). If import prohibitions were to persist, given the capital intensity of these sectors. In Nigeria, they would continue to provide incentives for fraud such investment represents a large share of gross and corruption at the borders, as well as for smuggling; capital formation, and its influence on exchange-rate thus, trade facilitation reforms would fail to have their volatility could greatly increase the risk that it poses to intended impact. Therefore, import prohibitions should macroeconomic stability and economic growth (World be removed before, or in parallel with, the introduction Bank, 2017). of trade facilitation reforms. A key factor in this regard is continued concerns over Trade restrictions and an unpredictable enforcement the reliability of Nigeria’s business environment. regime inhibit the competitiveness of the country’s Nigeria was ranked 125th out of 138 countries on the non-oil exports. Complex customs procedures are World Economic Forum’s latest Global Competitiveness exacerbated by a lack of publicly available information Index, evidencing a downward trend on macroeconomic about them, and by frequent harassment at the border. stability (Nigeria came 122nd, down 14 places from the For example, the lack of publicly accessible information previous year) and quality of institutions (125th, down regarding the ECOWAS Trade Liberalization Scheme seven places). There is an urgent need for increased results in many traders ignoring their rights under the economic activity and inclusive growth across all the scheme. In a bid to meet revenue targets, customs officials states in Nigeria. The Presidential Enabling Business often decline to recognize ECOWAS Certificates of Environment Council (PEBEC)31 has made efforts to Origin (Woolfrey et al., 2019). Other factors that inhibit cascade reforms to the state level through the set-up export competitiveness include poor infrastructure, of a Subnational Technical Working Group under the such as slow and inefficient port services, and the lack Enabling Business Environment Secretariat, tasked with of internationally recognized Quality Infrastructure (QI) “developing a sub-national business environment survey services, such as testing and certification. report to showcase the relative attractiveness of all states and regions in the country.”32 Nigeria stands to gain from reforms that address high costs and delays at the border, which would position the country as a logistics hub for the region and a 2.1.4  High trade costs create springboard into regional value chains. Nigeria has significant obstacles to private sector taken some steps to facilitate trade, but these are yet competitiveness to be reflected in key rankings. For example, Nigeria’s Logistics Performance Index ranking has deteriorated High trade costs, cumbersome customs procedures, from 92nd in 2016 to 95th (out of 160) in 2018, leaving and import prohibitions stifle the competitiveness the country behind most of its peers except Angola of Nigerian firms, distort the market, and prevent (which came last in the ranking). Nigeria’s performance firms from realizing gains from the integration into comparatively lags in three categories: customs GVCs. However, without reforming the protectionist (145th), international shipment (118th), and logistics trade policy regime first, the benefits of tackling issues competence (100th). of trade facilitation could be limited (Raballand and 31 The creation of the Presidential Enabling Business Environment Council (PEBEC) in 2016 played an important role in improving the business environment in Nigeria. The priority areas identified for reform included eight of the 10 Doing Business indicators, as well as two custom indicators: (i) the entry and exit of people, particularly at airports; and (ii) government transparency. Given the vast powers held by the states, strengthening governance at the state level is also key to achieving the country’s development goals. The indicators are: starting a business, registering property, getting credit, enforcing contracts, trading across borders, getting electricity, dealing with construction permits, and paying taxes. 32 https://easeofdoingbusinessnigeria.com/states-fct/sub-nationals. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 25 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Trade facilitation reforms would benefit Nigeria’s first section addresses the scope and scale of Nigeria's businesses and consumers, and also help tackle protectionist policies. The second section then assesses corruption.33 Such reforms would allow better and faster the impact of import restrictions on smuggling and access for businesses to production inputs from abroad, revenue, while the third section assesses the impact on and support greater participation in GVCs, which poverty and the fourth section looks at the impact on require products to cross borders several times. Countries firms' production costs. where inputs can be imported and exported in a quick and reliable manner are more attractive for FDI, and offer consumers lower prices, higher quality products, 2.2.1  The scale and scope of Nigeria’s and a greater variety of goods. Trade facilitation reforms protectionist policies have increased especially help small and medium enterprises (SMEs) significantly to participate in trade, addressing unnecessary costs related to trade procedures. This would be of particular A central characteristic of Nigeria’s trade regime in value to Nigeria’s MSMEs, which account for 84 percent recent years has been the key role of macro-fiscal of the total labor force, 48.5 percent of nominal policy, especially as dictated by the CBN. While the GDP, and about 7.3 percent of exports (World Bank, Federal Ministry of Industry, Trade and Investment 2019). Finally, trade facilitation removes incentives (FMITI) is mandated to formulate Nigeria’s trade and opportunities for border-related corruption, thus policy, the CBN has been intervening vigorously, supporting good governance and integrity. and increasingly directing trade policy toward import substitution. Furthermore, the CBN’s interventions go beyond its core mandate, and impose restrictive trade 2.2  Import restrictions undermine the and industrial policies through direct lending schemes country’s development goals and FX restrictions on a targeted group of imports. Notably, in 2015 the CBN announced restrictions on Nigeria’s weak trade performance in recent years access to FX for the import of some products that could has been exacerbated by its highly restrictive trade be produced locally, to preserve foreign reserves and regime. Nigeria implements both foreign-exchange (FX) boost local industries. A few other products were added restrictions on certain imports by the Central Bank of to this list in subsequent years. The effectiveness of these Nigeria (CBN), and outright import bans imposed policies, in a country with highly porous borders, a by the Nigeria Customs Service for reasons of trade large informal sector,34 and an underdeveloped domestic protection. In addition, Nigeria's tariffs are higher than supply chain, remains unevaluated and is likely limited. those of its competitors, and the recent border closure has exacerbated the negative impact on trade. Such In recent years, there has been a significant escalation restrictions lead to trade evasion and result in lost import in the scale and scope of import restrictions. Such revenues, higher commodity prices for Nigerian firms, restrictions are intended to support the development of and higher prices of goods for Nigerian households. domestic production and processing, especially for staple food items, but are also often the result of the successful Nigeria’s restrictive and unpredictable trade lobbying of individual firms and industries. Notable policies increase smuggling, diminish revenues, restrictions include: hurt consumers, and raise production costs. The 33 OECD, 2018. 34 The informal sector is estimated to account for 44 percent of Nigeria’s economy (WTO, 2017). 26 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE • FX restrictions:  In 2015, the CBN announced a temporary effect in impeding the transit of illegal restrictions on access to foreign exchange for the trade through Benin into Nigeria.36 The closure import of certain products that could be produced ended, at least partially, 16 months later, in January locally, with the aim of both bolstering FX reserves 2021. Available data suggest that the border closure and supporting domestic industries. However, had significant but short-lived consequences in as noted above, the resulting boost to domestic reducing the scale of smuggling.37 Although recent production has been modest. information about informal trade is very limited, a 2014 CBN survey found that the largest shares • Import bans:  The Nigeria Customs Service and the of unrecorded trade came from Niger (76 percent), CBN have long imposed a prohibition to import Cameroon (15.5 percent), and Benin (8.5 percent).38 certain products. The Nigeria Customs Service restrictions cover 23 “prohibited” products and • High tariffs:  Nigeria’s tariff regime is highly 21 “absolutely prohibited” products. Import bans restrictive. Statutory tariffs (the sum of import raise costs for domestic manufacturers that rely on duties, levies, and excise taxes) are above the global imported inputs when domestic alternatives are less median for raw materials (43rd percentile) and near easily available or of inferior quality, and drive down or in the top 10 percent of countries globally for the demand for manufactured goods. Import bans capital, intermediates, and consumption goods (7th, have also incentivized certain companies to move 11th, and 9th percentile, respectively). The overall production to neighboring countries where they have structure is also highly complex with numerous ad- easier access to foreign exchange (WTO, 2017). hoc and opaque exemptions that further complicate compliance for importing firms (FIGURE 2.14). • Border closures:  Most significantly, the FGN In 2016, Nigeria’s weighted average tariff for announced on August 22, 2019, the partial closure most-favored-nation (MFN) trade partners was of three border crossings with Benin and Cameroon, 11.25 percent—significantly lower than at the and the closure was extended to all land border beginning of the century, when it was around crossings two weeks later. The closure was intended to 25 percent, but double the Sub-Saharan African address: (i) illegal exports of subsidized gasoline from (SSA) average, 5.5 times higher than in Indonesia, Nigeria; (ii) imports of banned or illegally re-exported and nine times higher than in Mexico. goods, especially through Benin; (iii) imports of goods competing with Nigerian priority industries, • An anti-export bias in tariffs:  Nigeria’s system of for which Nigeria imposes high tariff and non- import duties and levies reduces the incentives to tariff barriers;35 and (iv) security concerns related to export. Nigeria has a cascading scheme in place for drugs, guns, and criminals entering the country. This import duties and levies—i.e., products upstream in closure coincided with a significant rise in inflation, the supply chain (raw materials/ intermediates) face especially for food products that are subject to lower tariffs and duties than final consumer products import restrictions. Moreover, the closure only had (FIGURE 2.14). Most countries impose some level 35 There has been a particular focus on achieving self-sufficiency in rice production, in part by halting illegal imports from Benin. Import tariffs and levies for most rice imports total 70 percent, and since 2015, the FGN has barred access to the CBN’s FX window to finance imports of rice, along with 42 other goods. 36 This is supported by interviews with border officials who claim that the closure resulted in the creation of new smuggling routes. For example, in the case of rice, Benin’s imports from Nigeria declined by 84 percent from July 2019 to January 2020, but recovered to pre-closure levels by August 2020, five months before a partial reopening of the borders. 37 Although these measures have likely supported certain domestic industries, there is strong evidence that these policies have had negative impacts on poverty reduction, competitiveness, and revenue generation. 38 CBN, 2016. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 27 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 of cascading in their tariff schedule to protect final least one NTM (equivalent to 86 percent of traded consumer industries, which tend to be associated products and 95 percent of value added). A notable with higher value addition. and pervasive NTM was pre-shipment inspection, which required inspecting goods before they arrived. FIGURE 2.14. Nigeria’s tariffs are among the highest in the world, especially for capital, Although officially abolished in 2019, it has merely intermediate and consumer goods been replaced by more onerous procedures upon Rank: 0 highest tariffs, 100 lowest tariffs arrival (IMF, 2021). 0 7 9 10 11 20 30 2.2.2  Import restrictions encourage smuggling and reduce revenues Higher tariffs 40 43 50 60 One of the areas where Nigeria’s trade restrictions have 70 had the most impact is in customs evasion. Import 80 90 bans, in combination with unpredictable enforcement 100 and cumbersome customs procedures, result in large Raw materials Capital Intermediates Consumer volumes of smuggling. Recent World Bank analysis Source: Own elaboration based on Nigeria’s customs data and UN Trains data. (Artuc et al., 2022a) provides crude estimates of tariff Note: The variable plotted is Nigeria’s normalized ranking (0 highest tariffs, 100 lowest) within 170 countries with data.39 evasion (i.e., the illegal and intentional non-payment of tariffs), and how it has changed with the introduction • However, tariff cascading is not innocuous: of FX restrictions, based on mirror statistics analysis. it distorts relative prices, potentially impacting  This analysis spots “evasion gaps”, which result from production efficiency, and Nigeria’s cascading is discrepancies between trade flows reported by countries particularly ‘steep’ compared with other countries. that export to Nigeria, and imports reported by Nigerian This strategy has created a bias against exporting customs authorities. Average evasion gaps in Nigeria because domestic producers focus more on exploiting are three times as high as in low-income countries. Key the protected domestic market rather than on results from this analysis include: exporting. • As tariffs go up, evasion increases: Tariff evasion is • Non-tariff measures:  Numerous policies and higher for goods subject to higher tariffs and import regulations, also known as non-tariff measures restrictions (FIGURE 2.15). The average evasion (NTMs), add costs to exports and imports. While gap40 for a product that is subject to above-median in some cases NTMs ensure product quality and tariffs is about 28 percent, compared with the average address public safety concerns, often they exist evasion gap in low-income countries of just 9 percent primarily to protect importers from competition. (Jean and Mitaritonna, 2010). Currently, almost 4,000 products are affected by at 39 To construct the graph, we obtain from UN Trains the simple average tariff for each broad economic category per country; for Nigeria we construct it using customs data. We then classify these categories into raw materials, intermediates, capital goods, consumer goods and others. We then calculate the simple average of the BEC categories that correspond to each product group. 40 Evasion gaps are the result of discrepancies in trade flows reported by countries exporting to Nigeria (mirror imports) and imports reported by Nigerian customs authorities (direct imports reported by Nigeria). To measure potential evasion, discrepancies in trade flows reported by countries exporting to Nigeria and imports reported by Nigerian customs authorities are exploited following Fisman and Wei (2004) using HS6-source country year “trade gaps”. The “trade gap” is defined here as the difference between exports to Nigeria reported by source countries and imports reported into Nigeria for each product and year. A correlation between tariffs and trade gaps (defined here as the difference between exports to Nigeria reported by source countries and imports reported into Nigeria at the HS6-country-year level), suggests tariff evasion. For example, importers may choose to misclassify goods subject to high tariffs as goods subject to lower tariffs, a practice that is especially common for differentiated products. Alternatively, importers may choose to declare lower prices than those actually paid and submit falsified invoices. 28 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE • Import and FX bans foster evasion:  Evasion gaps of the same products as recorded by trade partners fell are on average significantly higher for products substantially less, roughly halving over the same period. whose import is banned and for those subject to While part of the fall in reported imports may have been FX restrictions, suggesting that protectionism driven by slumping growth in Nigeria at that time, the induces evasion (FIGURE 2.16). Evasion is also above mentioned discrepancy attests to an uptick in tariff highly responsive to tariffs: a 10-percentage-point evasion, which increased by roughly 20 to 30 percent. increase in tariffs leads to an increase in evasion of FIGURE 2.17 presents an event study analysis of how 1.38 percentage points. reported imports, mirror imports, and evasion responded to the introduction of FX bans in 2015. Nigeria lost US$1.8 billion annually between 2010 and 2019 due to tariff evasion arising from The revenue impact of FX bans alone between protectionist measures. This is a conservative estimate 2015 and 2019 was about US$1.4 billion, or and is equivalent to 0.4 percent of GDP and 6.6 percent about US$275 million annually(FIGURE 2.18). of current overall tax revenues.41 Based on this estimate, This estimate considers revenue that would have overall tariff revenues would have been roughly been collected from the formally recorded trade that 45 percent higher each year in the absence of evasion.42 disappeared because of the introduction of the FX ban. This estimate and those mentioned above are based on Foreign exchange bans imposed in 2015 led to a preliminary data, and therefore to be interpreted with substantial drop in reported imports, which fell by caution; nevertheless, it is clear that Nigeria’s restrictive more than two-thirds. However, exports to Nigeria trade policies cause substantial evasion. FIGURE 2.15. As tariffs increase, evasion FIGURE 2.16. Evasion and protectionism44 increases too43 Trage gap, logs Log evasion gaps 3 0.8 0.7 2 0.6 1 0.5 0 0.4 0.3 -1 0.2 -2 0.1 0 -3 -0.1 -4 -0.2 Foreign exchange 0 10 20 30 40 High tariff Ban restriction Tariff J All J No J Yes Source: Authors’ own calculations using COMTRADE. Source: Authors’ own calculations using COMTRADE. 41 GDP in 2020 was US$432.8 billion and the tax-to-GDP ratio was 6.1 percent. 42 This calculation does not take into consideration the impact of evasion on trade flows (e.g., stricter enforcement of tariffs might reduce trade flows). 43 The graph shows a binned scatterplot of the relationship between log evasion gaps, defined as log exports to Nigeria reported by source country minus log imports recorded in Nigeria, versus tariffs over the period 2010–19. Observations are grouped into equally sized bins. 44 The graph shows average log evasion gaps, defined as log exports to Nigeria reported by source country minus log imports recorded in Nigeria, for different categories of goods. “High tariffs” are defined as tariffs in excess of 10 percent (the median). “Ban” denotes that the import of goods into Nigeria is prohibited. “Foreign Exchange Restriction” indicates goods for whose import foreign currency cannot be obtained. Sample period: 2010–19. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 29 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 2.17. Impact of FX restrictions on FIGURE 2.18. Without tariff evasion, Nigeria’s revenues revenues would be significantly higher45 Impact relative to 2014 Tariff revenue from goods subject to foreign exchange bans, million US$ 0.5 1,000 Introduction of foreign exchange restrictions Restrictions imposed 900 800 700 0 600 500 400 -0.5 300 200 100 -1.0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 J Imports Q Mirror imports ‹ Evasion ▬ Evasion ▬ Counterfactual revenue ▬ Actual revenue Source: Authors’ own calculations using COMTRADE. Source: Authors’ own calculations using COMTRADE. 2.2.3  Import restrictions are pushing the mix of jobs available in the economy (Engel et al., millions of Nigerians into poverty 2021). Estimating the importance of these channels relies on microdata on consumption, incomes, and jobs The effects of trade policies go beyond revenues (Atkin et al., 2020). and extend to distributional impacts on household welfare, especially through consumption and jobs. Previous work has shown that Nigeria’s import Trade can contribute to poverty reduction, although its prohibitions are strongly linked to increases in impact depends on where people live, their occupations poverty ( Cadot et al., 2012; Dabalen and Nguyen, and income. In turn, reforms in trade policy—as in all 2018). Further work carried out by Artuc et al. (2022b) other areas of policy—create winners and losers. This seeks to establish the impact of various trade restrictions occurs through two key channels. First, trade policies in place in Nigeria on domestic prices and household determine the prices that households pay for the welfare.47 The estimated coefficients for tariffs and FX goods that they buy. Second, trade policies influence restrictions are positive and statistically significant. The households’ income-generating activities.46 Changing magnitude of the impact is also notable: a 10 percent prices alters the incomes of households that produce reduction in tariffs would bring prices down by those goods, while international competition may alter 8.88 percent. 45 The graph depicts the evolution of tariff revenue of goods subject to foreign exchange bans (introduced in 2015). The dotted line “counterfactual revenue” depicts the estimated revenue that would have been collected had foreign exchange bans not been introduced. The red line “Evasion” denotes the tariff evasion induced by the introduction of foreign exchange restrictions. Sample period: 2010–19. 46 There are also indirect effects. For example, trade can alter the mix of jobs—and the earnings from those jobs—available in the economy through its impact on private investment, and by exposing domestic firms to international competition. Trade policy may also indirectly influence household welfare because tariffs are a source of government revenue, which could determine spending on health, education, and social protection, and may be reduced as trade is liberalized. 47 To link trade barriers and prices, the authors use detailed CPI prices for Nigeria for the period 2015–17. Monthly data on prices for 724 products across all Nigerian states, in both urban and rural areas, is available. Prices then vary at the state-month-area-product level. We combine this price data with information on trade restrictions including tariffs, levies, FX restrictions, and import bans. The regression model is: log(pits) = β1Tariffit + β2levyit + β3forexit + β4banit + λi + λt + λs + εits where i indexes products, t, time, and s, states. λi, λt, and λs are the corresponding product, time, and state fixed effects. We also include fixed effects for rural/urban areas. Fixed effects are included sequentially. In all specifications, we include product fixed effects. In doing so, at this stage, the variables levies and bans drop from the regression. Levies are omitted because all products have the same levy across the period, so there is no within variation to exploit. Similarly, there is no variation in bans during 2015–17. 30 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE Distortionary trade policies can decrease overall by calculating the “compensating variation”, i.e., the purchasing power and, in turn, increase poverty.48 amount of money needed to maintain household welfare The 2019 border closure, for example, coincided with a at the same level while prices rise (FIGURE 2.20).49 significant rise in inflation (FIGURE 2.19), including for domestically produced goods. In principle, households’ Import bans caused the prices of affected goods to exposure to protectionist price shocks depends on the increase by as much as 37.5 percent.50 Conversely, the specific goods that they buy; but it is apparent that removal of FX restrictions would lead to sizeable price buying local goods, which poorer Nigerians might do reductions (Artuc et al., 2022b). This is in line with more, offers little insulation against such price shocks. previous findings in the literature: Treichel et al. (2012) Indeed, when Nigeria’s land borders were closed in 2019, estimated that replacing import bans with tariff duties the prices of both imported and local varieties of rice would result in a 9.4-percent increase in household real increased. Since international and domestic markets are income for all income groups, and a 10-percent increase so integrated, it is hard to escape the price increases and for the first (poorest) quartile of the income distribution. purchasing power drops from protectionist policies. This is because import prohibitions hurt poorer households relatively more. The largest welfare gains for The price increases recorded between mid-2019 households across all income groups would come from and 2020 following the border closure meant that eliminating the import ban on household supplies, households needed to spend around 1.8 percent followed by that on textiles and clothing. More recently, more to maintain the same level of welfare. Although Dabelan and Nga (2018) estimated that eliminating welfare losses during this time were not fully attributable import bans would reduce national poverty rates by as to the border closure, they could have increased poverty much as 2.6 percentage points. by around 1.1 percentage points. This is estimated FIGURE 2.19. The price of both imported and FIGURE 2.20. Changes in welfare and poverty domestic rice increased after the border closure linked to price changes after the border closure Price of 1kg of rice, naira Compensating variation, percent 600 2.4 Petrol 550 Dairy 1.9 Fish 500 Other meat 450 1.4 Poultry and eggs 400 Vegetables 0.9 Oils and fats 350 Pulses, nuts, and seeds 300 Starchy roots, tubers, and 0.4 plaintains 250 Other grains/bread/maize Imported rice 200 -0.1 Local rice Ap -17 Ju 17 O -17 Ja -17 Ap -18 Ju 18 O -18 Ja -18 Ap -19 Ju 19 O -19 Ja -19 Ap -20 Ju 20 O -20 Ja -20 Ap -21 Ju 21 O -21 1 -2 Total compensating variation r- r- r- r- r- n l ct n l ct n l ct n l ct n l ct -0.6 Ja J Border closure ▬ Local ▬ Imported Source: 2018/19 NLSS (for consumption data), NBS (for price data), and Source: 2018/19 NLSS (for consumption data), NBS (for price data), and World Bank estimates. World Bank estimates. Note: Figure shows price movements for the goods labelled “Rice local sold Note: Estimates exclude Borno. Welfare losses calculated for purchased loose” and “Rice, imported high quality sold loose” in NBS price data. goods only; own-produced items are excluded from the calculations. 48 is section in part draws on the World Bank’s (2022a) Nigeria Poverty Assessment. 49 This can be calculated by multiplying the change in price for each good—from NBS price data—by the share of the consumption basket devoted to purchasing that good—taken from the 2018/19 NLSS. In previous analysis, including the Nigeria Development Updates from June 2020 and June 2021 (see World Bank 2020 and World Bank, 2021), purchased food and own-produced food were not separated out. However, here the analysis focuses on purchased food only. This is because only purchases would be exposed to price shocks. 50 Preliminary World Bank estimates. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 31 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 2.21. The impact of liberalizing trade would vary by state depending on what households consume and produce Sokoto Sokoto Katsina Jigawa Katsina Jigawa Kebbi Zamfara Yobe Kebbi Zamfara Yobe Kano Borno Kano Borno Kaduna Bauchi Kaduna Bauchi Gombe Gombe Niger Adamawa Niger Plateau Plateau Adamawa FCT FCT State-level changes in Kwara Kwara Nasarawa Nasarawa poverty headcount rate Oyo Taraba Oyo Taraba (percentage point change) Ekiti Kogi State-level changes in Ekiti Kogi No data Osun Osun Benue average welfare (percent) Benue 0–1.5 Ogun Ondo Ogun Ondo Edo No data Edo -1.1–0.0 Lagos Less than 0 Lagos -2.1–-1.0 Ebonyi Ebonyi Enugu 0.1–3.0 Enugu -3.1–-2.0 Cross River Cross River Anambra Delta Imo 3.1–4.0 Anambra Delta Imo -4.1–-3.0 Abia Abia 4.1–5.0 -6.1–-4.0 Bayelsa Akwa Ibom Bayelsa Akwa Ibom Rivers 5.1–6.0 Rivers -8.1–-6.0 Source: 2018/19 NLSS (for consumption data), NBS (for price data), Humanitarian Data Exchange (for map shape files), and World Bank estimates. Note: Estimates exclude Borno. Poverty calculated using Nigeria’s national poverty line. Income and poverty changes were calculated using the HIT model, in which 2018/19 NLSS data were incorporated. Income captured by households’ consumption, a measure of their welfare. NBS price data from 2015 to 2017 and information on previous trade policies were used to estimate the pass-through from trade policies to prices. Reductions in tariffs and levies are likely to lead 2.2.4  Import restrictions increase to increased welfare. According to an analysis of the production costs for firms household impacts of tariffs, fully liberalizing trade would increase household income—the amount of The current import tax scheme results in high goods households can buy in Nigerian naira terms—on production costs and high levels of protection for average, by 3.8 percent and reduce the share of people domestic industries. High taxes on intermediates living in poverty by 2.3 percentage points.51 This is and capital goods translate into high production costs because liberalizing trade would lower prices, and the for domestic industries. This occurs either through resulting gains in purchasing power outweigh any a direct increase in the cost of imported production income losses for households producing the goods that inputs, or through an increase in the market power of end up being cheaper. domestic producers of intermediates, who face less foreign competition and can charge higher prices for Even without full liberalization, targeted reductions their products. Similarly, high taxes on consumption to trade barriers for key consumer goods would goods protect the domestic industries that produce those make a major difference. If trade levies (i.e., taxes on goods from foreign competition by increasing the cost of imports that are additional to tariffs) on rice, sugar and imported varieties. Although the current tariff schedule wheat were reduced by 50 percent, overall welfare would grants some protection to most industries, industrial increase by 0.8 percentage points and extreme poverty sectors such as food processing, textiles, and motor could decrease by 0.4 percentage points (FIGURE 2.21). vehicles benefit the most, while commodity producers However, these results vary from state to state, with (minerals, raw milk, sugar cane, bovine meat) benefit the some northern states seeing the largest total reduction in least. poverty. In Benue and Kebbi, on the other hand, poverty would increase slightly as gains in terms of consumer The average industry in Nigeria pays 13.7 percent expenditure would not exceed losses for producers. more for its inputs than what it would have paid in the absence of tariffs and other related taxes(Ganz, 51 New analysis using the “household impacts of tariffs” tool looks at the value of what households produce as well as what they consume. The analysis considers what would happen if trade were fully liberalized in Nigeria: while this is unlikely, at least in the short run, it remains a useful benchmark for assessing trade policy. 32 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE 2021).52 The total output of an industry can be divided Trade policy reforms that reduce tariffs on upstream into three parts: (i) the intermediate consumption of sectors can help firms become more competitive and commodities (goods); (ii) the intermediate consumption better integrated into GVCs. In modern production of services; and (iii) the value added. This offers three processes, firms rely on imported inputs to produce ways to measure how much higher production costs are finished goods. These inputs are manufactured in due to the existence of import taxes in Nigeria: (i) as multiple locations, and cross borders many times before a share of total output; (ii) as a share of intermediate they are assembled into a final product. For example, consumption of both goods and services; or (iii) as a a mobile phone manufacturer will require as inputs share of the intermediate consumption of goods. The a circuit board, keyboard and display produced by average increase in total output costs (i.e., the upstream upstream manufacturers in other countries. Tariffs on tariff) across industries is 3.2 percent; the average these inputs would increase their cost, which would increase in the cost of all intermediates is 8.2 percent; be passed on to the cost of the mobile phone. Tariffs and, lastly, the average increase in the total cost of goods can, in turn, affect the competitiveness of firms in used as intermediates is 13.7 percent (FIGURE 2.22). two ways: they increase the prices of imported inputs Higher production costs in turn make it difficult for necessary for completing their products, and they Nigerian firms to compete against producers based in reduce the incentives for firms to export by making the countries that levy lower tariffs on inputs. FIGURE 2.22. Import taxes and restrictions result in higher production costs and domestic industry protection53 Output tariffs, upstream tariffs, and effective protection in Nigeria, by industry Percent Percent 60 600 50 500 40 400 30 300 20 200 10 100 0 0 -10 -100 Plant-based fibers Oil seeds Animal products n.e.c. Fishing Dairy products Crops n.e.c. Metals n.e.c. Gas manufacture, distribution Wheat Coal Electricity Chemical, rubber, plastic pro Forestry Transport equipment n.e.c. Minerals n.e.c. Cereal grains n.e.c. Sugar cane, sugar beet Bovine meat prods Gas Raw milk Petroleum, coal products Textiles Mineral products n.e.c. Manufactures n.e.c. Vegetables, fruit, nuts Food products n.e.c. Oil Wearing apparel Ferrous metals Vegetable oils, fats Meat products n.e.c. Metal products Paddy rice Wood products Leather products Electronic equipment Paper products, publishing Bovine cattle, sheep, goat Machinery, equipment n.e.c Beverages, tobacco product Sugar Processed rice Motor vehicules and parts Wool, silk-worm cocoons J Effective protection, rhs Q Output tariff ‹ Upstream tariff Source: Ganz (2021) based on ASYCUDA and NICIS data and the upstream tariff simulator (UTAS) simulator. 52 This analysis draws on two tools developed by the World Bank: the Tariff Reform Impact Simulation Tool, which allows for the estimation of the impact of tariff reform on fiscal revenue; and the Upstream Tariff Simulator (UTAS), which allows us for the estimation of the impact of tariff reform on production costs and effective protection. 53 Industries are classified according to global trade analysis project and ranked by effective protection. Inputs for UTAS: Nigeria’s effective import duties (all collected import taxes, excluding VAT, as a percentage of imports) and 2006 global trade analysis project input-output table for Nigeria, using the homogeneous goods framework (perfect substitutability between imported and domestic varieties). For more details, see UTAS. Effective protection is defined as the difference between the output tariff and the upstream tariff, divided by the share of value added in the industry’s output. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 33 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 domestic market artificially more attractive (via effective production costs of most industries (FIGURE 2.23). protection) than the unprotected export market. The upstream tariff as a percentage of total output falls on average 0.3 percent across industries, and The FGN could reform its tariffs to reduce production 1.8 percent for goods used as production inputs. While costs, while still preserving fiscal revenue. While this is just an example, it highlights that there is not Nigeria is somewhat constrained in the setting of tariffs necessarily a trade-off between tariff reforms that support by the five bands in the ECOWAS Common External the competitiveness of local industries and revenue Tariff (i.e., 0, 5, 10, 20 and 35 percent), it still has some collection. flexibility of where to set tariffs within the tariff band structure and how high to set levies beyond these tariffs. We consider a hypothetical scenario in which Nigeria 2.3 Finding the right balance: how sets effectively collected import duties (tax collected as industrial and trade policy can contribute a share of imports) on consumer goods at 17 percent (a to Nigeria’s development aims flat collection rate almost 3 percentage points below the current average statutory tariff), while cutting import Further continental integration can help enhance the duties on intermediates by 50 percent. This would competitiveness of Nigeria’s manufacturing sector. require removing numerous exemptions on consumer By making manufacturing more competitive, Nigeria goods while cutting the tariff for intermediates. Tariff could leverage regional market integration to achieve revenue collection would increase slightly, but most economies of scale, lower costs, and increase its broader of that increase is compensated by a reduction in VAT international competitiveness. Regional value chains can, collection associated with slightly fewer imports. Overall, in turn, offer a stepping-stone toward GVCs. Increased the proposed change implies a 0.5-percent increase in competitiveness from regional integration can lead to total revenues. However, this reform would reduce the greater diversification of export products and markets, FIGURE 2.23. Nigeria could reform its tariff schedule to reduce production costs while increasing revenues Impact of tariff schedule reform removing exemptions on consumer goods and reducing tariffs on intermediate goods on upstream tariff, by industry Percentage points 0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5 -4.0 SGR - Sugar OFD - Food products n.e.c. NFM - Metals n.e.c. FMP - Metal products OMF - Manufactures n.e.c. ELY - Electricity GDT - Gas manufacture, distribution FRS - Forestry FSH - Fishing COA - Coal OIL - Oil GAS - Gas OMN - Minerals n.e.c. CMT - Bovine meat prods OMT - Meat products n.e.c. VOL - Vegetable oils and fats MIL - Dairy products PCR - Processed rice TEX - Textiles LEA - Leather products LUM - Wood products P_C - Petroleum, coal products CRP - Chemical, rubber, plastic products NMM - Mineral products n.e.c. I_S - Ferrous metals MVH - Motor vehicules and parts OTN - Transport equipment n.e.c. B_T - Beverages and tobacco products ELE - Electronic equipment OME - Machinery and equipment n.e.c. WAP - Wearing apparel PPP - Paper products, publishing PDR - Paddy rice WHT - Wheat GRO - Cereal grains n.e.c. V_F - Vegetables, fruit, nuts OSD - Oil seeds C_B - Sugar cane, sugar beet PFB - Plant-based fibers OCR - Crops n.e.c. CTL - Bovine cattle, sheep and goats, horses OAP - Animal products n.e.c. RMK - Raw Milk WOL - Wool, silk-worm cocoons J Percent of goods inputs ▬ Percent of output Source: Ganz (2021) based on ASYCUDA and NICIS data and the UTAS simulator. 34 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE and incentivize domestic producers to compete with Nigeria’s transition toward a more diversified, foreign firms. The vibrant entrepreneurial ecosystem productive, and inclusive economy will require strong in Nigeria would benefit from being connected to implementation. Three actions need to be taken. First, technological and process innovations, know-how, current macroeconomic and trade policies are not diaspora mentorship, and research and development conducive to diversification and would benefit from (R&D). This could include supporting existing networks adopting a less heavy-handed, interventionist approach. of R&D institutions to foster innovation. In particular, there is an urgent need for significant trade policy reforms to address import restrictions that shield Trade offers a vital, but often untapped, pathway to some incumbents from competition but hurt consumers poverty reduction. Through its effects on investment, and most firms, while constraining government revenues. technology transfer, and competition, trade can help Second, high domestic and international transport growth, boosting job creation, increasing domestic value costs and weak trade facilitation infrastructure create added, and reducing the price of goods that Nigerians significant operational obstacles for businesses both buy. All such effects may contribute to reducing behind and at the border. Third, it will be essential to poverty. However, the benefits from trade are not strengthen the institutional and policy infrastructure to automatic. There is a need for careful sequencing, broad support reforms and their implementation. Addressing consultation, and finding a way to maximize the gains these issues will help define Nigeria’s future as either an from trade while taking proactive measures to support economic and political leader in Africa or a large but the adjustment process. This includes understanding stagnating economy that continues to ‘muddle through’. how to facilitate labor mobility, as well as the importance of complementary policies such as business environment reforms and supporting skills development. The following policy options provide an overview of the way forward. Key Policy Options Which Reforms Are Critical Why Reforms Are What Impact These Reforms Needed Short-Medium Term Medium-Long Term Could Have (6–18 months) (18–36 months) Reform trade policy to safeguard revenues, reduce poverty and support producers • Nigeria urgently • Facilitate imports of staple • Following the review of • Positive impact on tariff needs to reform foods and medicines by existing FX restrictions revenues and lower levels its restrictive removing them from the and import bans, replace of smuggling trade policy that list of import bans, and them with tariffs. • Prices for many key negatively impacts applying tariffs that reflect • Reform tariff schedule products would be lower, poverty, revenue, the ECOWAS Common to reduce input costs, allowing consumers and domestic External Tariff. including by reducing the to increase their competitiveness of • Review FX restrictions number of duties and consumption and reduce firms and import bans on charges on imports. poverty non-food goods, and • Cheaper intermediate assess the implication of inputs for many industries alternative policies such would foster substantial as replacing them with growth and job creation in high tariffs. these sectors • Review tariffs to reduce the costs of key inputs for domestic producers. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 35 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (continued) Which Reforms Are Critical Why Reforms Are What Impact These Reforms Needed Short-Medium Term Medium-Long Term Could Have (6–18 months) (18–36 months) Reform trade policy to safeguard revenues, reduce poverty and support producers • Nigeria will • Improve awareness and • Strengthen Nigeria’s • Stronger awareness stand to gain consultation process trade policy management, of trade opportunities from regional around AfCFTA, agencies’ implementation through the AfCFTA integration and the and advance the capacity and performance • Improve the implementation implementation of a surveillance. competitiveness of the of the AfCFTA at National AfCFTA Strategy. • Develop a time-bound manufacturing sector the federal and • Assess compliance and program to promote subnational levels implementation of the the productivity and AfCFTA at the federal and competitiveness of state levels, and continue domestic manufacturing negotiations on trade in firms to support their services. transition to a more liberalized trade policy environment under the AfCFTA. Reducing international trade and transport costs • Nigeria will • Identify and publicize • Review and eliminate • Transparency and benefit from trade-related fees and trade-related fees such as elimination of trade- reforms aimed levies that can impede haulage fees, and publish related fees at the state at eliminating domestic exporters’ fees for domestic and and federal levels high trade costs competitiveness and limit international trade. • Lower trade costs for and improving their market access. • Expedite implementation businesses and increased participation • Advance the simplification of reforms required for participation in regional in regional and harmonization of Nigeria’s full alignment value chains value chains documents, streamline with the WTO TFA (high- by minimizing • Improved trade facilitation and automate procedures, and medium-priority would provide an distortions and improve governance, measures) under the resulting from expanded platform for impartiality of decision- AfCFTA. Nigerian manufacturers NTMs making, and availability of • Introduce National Single and service providers to information. Window. connect with regional and • Streamline import • Put in place a Trusted continental value chains. documentation Trader Program that • Improved transit requirements and makes processes easier information among enhance the transparency and smoother for pre- ECOWAS members and efficiency of customs approved businesses. procedures, speeding up • Periodical review clearance time. • Establish database of NTMs and trade- for NTMs and review related bottlenecks, and • Review NTMs and periodically with private improved compliance with the status of the sector consultations. the WTO TFA implementation of the WTO TFA. • Improve trade logistics and transport • Ensure the regulations, and soft/hard implementation of infrastructure. ECOWAS SIGMAT (a regional transit module • Continue to expand the to exchange transit capacity of ports. information between ECOWAS customs clearance systems). • Address bottlenecks such as port processes and transportation costs. 36 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (continued) Which Reforms Are Critical Why Reforms Are What Impact These Reforms Needed Short-Medium Term Medium-Long Term Could Have (6–18 months) (18–36 months) Creating an appropriate institutional infrastructure to support implementation • Nigeria lacks a • Complete the ongoing • Implement the new trade • A more predictable trade strong institutional trade policy review by policy that supports policy with fewer ad- framework that clarifying roles and export diversification and hoc exemptions could enables the responsibilities in trade competitiveness. increase investment and formulation and policy formulation, and • Improve trade policy production efficiency, implementation of creating an institutional implementation through as well as support trade trade policy environment that strong institutions. diversification and • Nigeria’s approach promotes domestic competitiveness business competitiveness, • Establish an is based on an implementation roadmap • Independence on trade outdated policy export diversification, and policy and lower risk of growth. to ensure coordination framework at the federal and ad-hoc import restrictions and relies on • Review the institutional subnational levels, among • Coordination among numerous ad-hoc architecture around ministries and private ministries will create a decisions Nigeria's trade policy, sector organizations favorable environment and identify bottlenecks through consultation for export diversification that can improve trade processes. and competitiveness by policy formulation and reducing the institutional independence. • Clearly delineate the role of different institutions in bottlenecks related to • Review and update the trade policy process, trade policy formation the trade policy legal and improve coordination. framework, including by reviewing, updating or eliminating outdated laws, and establishing a more effective monitoring framework to evaluate the impact of trade policy. Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 37 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 References Global Entrepreneurship Monitor. 2013. Entrepreneurial Behaviour and Attitudes. London: Global Entrepreneurship Research Association. International Finance Corporation. 2020. 2020 IFC Artuc, E., Engel, E., G. Falcone, Lain, J., G. Porto, B. Annual Report. Washington, DC: IFC. Rijkers and M. Shuaibu. 2022a (forthcoming). “Quantifying Tariff Evasion in Nigeria” Mimeo. International Finance Corporation. 2020. "Creating Markets in Nigeria: Country Private Sector Artuc, E., G. Porto and B. Rijkers. 2022b (forthcoming). Diagnostics". Washington, DC: IFC. Welfare Enhancing Evasion: Evidence from Nigeria, Mimeo. The household impacts of International Monetary Fund. 2021. Selected Issues tariffs Simulation Tool can be accessed at https:// paper on Nigeria. IMF Country. Report No. www.worldbank.org/en/research/brief/hit/ 22/34. Arenas, Guillermo, Vnukova, Yulia. 2019. “Short-Term Jean, S., and Mitaritonna, C. 2010. Determinants and Revenue Implications of Tariff Liberalization Pervasiveness of the Evasion of Customs Duties. under the African Continental Free Trade Area CEPII, Working Paper No 2010–26. (AfCFTA).” Washington, DC: World Bank. Licetti, M.M., Iootty, M., Goodwin, T., and Signoret, Artuc, Erhan, Guido Porto, and Bob Rijkers. 2022. J. 2018. “Strengthening Argentina's Integration "The Inequality Adjusted Gains from Trade." into the Global Economy: Policy Proposals Economic Studies in Inequality, Social Exclusion, for Trade, Investment, and Competition”. and Well-Being. International Development in Focus. Washington, DC: World Bank. Cadot, Olivier, Céline Carrère, and Vanessa Strauss‐ Kahn. 2013. "Trade diversification, income, and NBS. 2019. Nigeria – Living Standards Survey growth: what do we know?" Journal of Economic 2018–2019. 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Trade Policy Review 2017 Note 2: Integrating Nigeria through Better Trade Policies for Investment and Diversification 39 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb Authors: Samik Adhikari, Tekabe Ayalew Belay, Olumide Olaolu Okunola, Aisha Garba Mohammed, Fatimah Abubakar Mustapha, Julia Vaillant, and Amy Elizabeth Copley TECHNICAL NOTES  |  CHARTING A NEW COURSE Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb Summary: As Nigeria enters a period of rapid expansion 3.1  Introduction and Context of the working-age population, there is a window of opportunity to benefit from the “demographic Nigeria’s demographic transition has stalled, dividend”, a period during which the share of those who prolonging its placement as a “pre-dividend” are working starts to outnumber the share of young and country with the decline in fertility rates lagging old dependents, and the increase in labor supply boosts other countries and regions.54 Nigeria accounts for economic growth. However, Nigeria’s transition into this 20 percent of the population of SSA and is projected window of demographic opportunity has been sluggish. to be the third-most-populous country in the world Nigeria’s persistently high fertility rates, especially in the by 2040, with over 400 million inhabitants. Nigeria’s Northern regions of the country, among adolescent girls, population structure, however, continues to be heavily among the poor, and among those with low education skewed toward young dependents because of high attainment, threaten to derail the demographic transition fertility rates. FIGURE 3.1 (Panel A) plots the rate of in the country. Poverty, low prevalence and demand for decline in Total Fertility Rate (TFR)55 over the past modern contraception, and a lack of quality secondary two decades among countries on the African continent schools and job market opportunities all contribute and provides three categories: (i) countries where TFR to high rates of teenage pregnancy, early marriage, and decline has been less than 0.05 per year are categorized low educational attainment among Nigeria’s adolescent as having a “stalled” transition; (ii) countries where girls. To realize the demographic dividend, Nigeria TFR decline has been between 0.05 and 0.1 per year must kickstart the stalled demographic transition are categorized as “early transition”; and (iii) countries process and ensure that the children of today have the where TFR decline has been more than 0.1 per year are means to grow into healthy and productive adults. On categorized as “transition”.56 Nigeria is one of only four these fronts, Nigeria’s performance thus far fares poorly countries in Africa with TFR of above 5 and the pace compared with its structural and aspirational peers. of decline of TFR of less than 0.05 per year along with Policy recommendations center around the need for Niger, the Republic of Congo, and the Gambia. Most Nigeria to focus its efforts and resources on ensuring that other countries with stalled demographic transition have Nigeria’s adolescent girls remain in school longer, and TFR below 3 and mostly lie in Northern Africa (Egypt, are provided opportunities and services to enable their Morocco, Libya, Algeria, and Tunisia) and Southern school-to-work transition. Africa (South Africa, Botswana, and Eswatini). Nigeria’s potential for reaping a demographic dividend is grim owing to persistently high fertility rates. Between 2020 and 2050, Nigeria’s working- 54 A country is classified to be in a pre-dividend typology when the working-age population is projected to grow within the next 15 years, and when the total fertility rate is above four. Early dividend countries follow a similar definition; except they have a total fertility rate below four. The demographic dividend, which is in essence an economic surplus, is triggered when, owing to the fast decline of fertility, the working-age population becomes relatively larger and the dependency ratio for young people becomes more favorable. 55 The World Health Organization defines the TFR as the average number of children a hypothetical cohort of women would have at the end of their reproductive period if they were subject during their whole lives to the fertility rates of a given period and if they were not subject to mortality. It is expressed as children per woman. 56 A decline of TFR of 0.05 per year roughly corresponds to the decline in TFR by one child every 20 years. Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 41 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 age population is projected to increase by 132 million. the TFR among women in the poorest quintile (6.7) is This represents 20 percent of the expected increase in 2.9 percentage points higher than TFR among women the working-age population across all of SSA and is in the richest quintile (3.8). second only to India in terms of countries expected to see the largest growth in their working-age population This stall in demographic transition dims Nigeria’s by 2050. Advancements in medical sciences and public prospect for a demographic dividend in the near health have ensured rapid decline in child mortality rates future. The demographic transition is where the in Nigeria and SSA. However, the decline in fertility necessary conditions to capture a demographic dividend rates has not kept pace with the kind of decline seen are created because of declines in child mortality and in child mortality. Nigeria’s TFR has failed to decline fertility (see BOX 3.1) and the increase in the share of substantially over the past five decades. FIGURE 3.1 working-age population compared with the number of (Panel C) shows that TFR in Nigeria has declined only dependents. FIGURE 3.1 (Panel B) plots the ratio of 0.7 of a percentage point in the past 30 years, from 6.0 the projected working-age population (15–64) to the in 1990 to 5.3 in 2018. As might be expected, the TFR projected population of young dependents (0–14) in is higher in rural areas than in urban areas, but the TFR Nigeria and peer countries between 2020 and 2050.57,58 has only declined by 0.5 of a percentage point in urban It shows that in 2050, for every young dependent, areas compared with 0.4 of a percentage point in rural Nigeria will only have 1.5 members in the working- areas in the past 30 years. Comparing Nigeria’s trends in age population, compared with 2.1 in Ghana, 2.6 in TFR with other regions and countries around the globe, Pakistan, 3.4 in Indonesia and 4.2 in Bangladesh. In FIGURE 3.1( Panel D) shows that the decline in TFR in other words, comparator countries will have a higher Nigeria has been sluggish over the past 50 years, lagging share of economically active members contributing to the decline in TFR in SSA and other regions across the the economy than Nigeria. globe. In comparison, South Africa’s TFR declined from 6.0 in 1960 to 2.4 in 2019. Adolescent girls are a crucial demographic group that holds the key to fast-tracking Nigeria’s demographic Fertility rates in Nigeria are the highest in the North, transition. There are several reasons why addressing the among women in the poorest quintile, and among needs of Nigeria’s adolescent girls and empowering them women with no secondary education. FIGURE 3.2 presents Nigeria with the best window of opportunity shows the TFR disaggregated by urban/rural, zones, to harness a demographic dividend. First, adolescents education level of mother giving birth, and wealth in the age group of 10–19 constituted an estimated quintile. The North-West region in Nigeria has a TFR 23 percent of Nigeria’s population in 2020 and will of 6.6, which corresponds to the second-highest fertility continue to represent more than 20 percent of the rate among any country in the world, behind only Niger. population by 2050.59 Second, and similar to TFR, On average, the state with the lowest TFR is Lagos Nigeria’s Adolescent Fertility Rate (AFR) of 104 births with 3.4 and the state with the highest fertility rate is per 1,000 women aged 15–19 is very high compared Katsina with 7.3. Similarly, TFR among women with no with its income level (FIGURE 3.3 Panel B), and education (6.7) is almost twice the TFR among women substantially higher than the average in the Northern who have completed secondary education (3.4), and regions of the country.60 57 Structural and aspirational peers are identified in the World Bank Systematic Country Diagnostics for Nigeria (2019). Available at: https:// openknowledge.worldbank.org/handle/10986/33347. 58 Population projections are estimated using the “medium” variant scenario in the World Population Prospects data. Available at: https://population. un.org/wpp/. 59 Population projections are estimated using the “medium” variant scenario in the World Population Prospects data. Available at: https://population. un.org/wpp/. 60 The World Health Organization defines the AFR as the annual number of births to women aged 15–19 years per 1,000 women in that age group. It is also referred to as the age-specific fertility rate for women aged 15–19. 42 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 3.1. Nigeria's stalled demographic transition Panel A: Rate of TFR decline over the past two decades Panel B: Ratio of working age population (15–64) to young dependents (0–14), Nigeria and peer countries, 2020–50 4.5 Morocco Algeria Libya Egypt 4.0 Mauritania Mali Niger Sudan 3.5 Eritrea Senegal Chad Burkina Faso Guinea Nigeria Sierra Central South Ethiopia African Sudan 3.0 Leone Republic Somalia Cameroon Cote Ghana Uganda d'Ivoire Gabon Democratic Republic Kenya 2.5 Republic of of Congo the Congo Tanzania Angola Mozambique 2.0 Zambia Zimbabwe Madagascar Namibia Botswana 1.5 South Africa 1.0 2020 2025 2030 2035 2040 2045 2050 J Less than 0.05 - stalled J 0.05–0.1 - early transition ▬ VNM ▬ BGD ▬ IDN ▬ EGY ▬ PAK J More than 0.1 - transition ▬ GHA ▬ TGO ▬ SSA ▬ NGA Panel C: Nigeria's TFR, rural and urban areas, 1990–2020 Panel D: Rate of TFR decline, Nigeria and comparator regions and countries, 1990–2020 6.5 8 6.3 6.3 6.2 6.1 6.5 6.8 6.0 7 6.4 6.5 6.0 5.9 6.1 5.7 5.8 6 6.0 5.3 5.5 5.5 5.7 5.5 5.3 5 5.0 5.0 4 5.0 4.9 4.0 4.7 4.7 3 4.5 4.5 2.7 2.6 2 2.4 4.0 1 1990 1995 2000 2005 2010 2015 2020 1960 1970 1980 1990 2000 2010 2020 ▬ Rural ▬ Urban ▬ Total ▬ EAP excl. high-income ▬ LAC excl. high income ▬ MENA excl. high income ▬ NGA ▬ SA ▬ SSA excl. high income ▬ South Africa Source: World Bank calculations using data from the World Development Indicators (Panel A; Panel C; and Panel D) and UN World Population Prospects (2019) (Panel B). In fact, the AFR for four of Nigeria’s Northern States FIGURE 3.2. The TFR in Nigeria is highest in the North, among females with no education, and (Bauchi, Jigawa, Zamfara, and Katsina) is higher than among the lower wealth quintiles the country with the highest AFR (Niger has an AFR TFR in Nigeria, 2018, national and disaggregates of 180). Nigeria’s AFR has failed to decline below 100 7 over the past 50 years and the pace of decline lags that 6 of SSA and peer countries. It is also worth noting that 5 4 Nigeria recorded increases in the birth rates by girls aged 3 10–14 years between 2007 and 2017 (United Nations, 2 2020). Third, and most importantly, interventions 1 that help adolescent girls reach their full potential by 0 Secondary More than secondary South West Primary Lowest Second Middle Fourth Highest Overall Urban Rural North Central North East North West South East South South No education increasing their education levels and skills and delaying childbearing and early marriage have the potential to create a virtuous cycle that improves adolescent and child NGA Urban /rural Zone Education level Wealth quintile health, and paves the way for women empowerment, Source: Nigeria Demographic and Health Survey (NDHS), 2018. Total fertility rate for the 3 years preceding the survey among women between the ages of ultimately leading to higher economic growth (Canning 15–49. et al., 2015). Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 43 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 BOX 3.1. What is the demographic dividend and why is it important for accelerated economic growth and development? A demographic dividend is the economic benefit accrued by a country when it undergoes a rapid decline in child mortality rate followed by a rapid decline in birth rate, resulting in smaller and healthier families, and a youth population empowered and ready to enter the labor market. FIGURE B3.1 shows the four distinct stages of the demographic transition in relation to the birth and death rates in a country. • The first stage starts and ends with high birth and FIGURE B3.1. The four stages of demographic transition death rates. • Death rates start to decline in the second stage Stage 1 Stage 2 Stage 3 Stage 4 owing to advancements in public health and medical sciences aiding in both child survival and Birth rate adult longevity, while the birth rates continue to Death rate remain high. • The third stage sees a decline in birth rates Population 1st Dividend growth rate owing to a decline in child marriage and early 2nd Dividend pregnancy, and a more widespread use of family planning measures. The first demographic dividend is realized toward the end of the third Time stage when both birth and death rates reach low levels, resulting in smaller families and increased public and private per capita investment in health, education, and other forms of human capital, and an economic surplus due to an increase in labor supply. • In the fourth stage of the transition, a possible second dividend could result from continued savings from the bulge cohort resulting in productive investments in the economy. Recent simulations show that a sustained reduction in fertility is associated with higher economic growth. There are various recent examples of empirical work that seek to estimate the impact of reduced fertility on economic growth in Nigeria. For example, a 2017 World Bank simulation analysis finds that a one-child difference in Nigeria’s fertility rates by 2050 can lead to a 29 percent increase in real GDP per capita, growing from US$2,777 (constant US$) in 2015 to US$9,362 by 2050 (World Bank, 2017). An earlier simulation analysis by Ashraf et al. (2013) finds similar results and conclude that a decline in TFR of 0.5, phased in over a period of 15 years and relative to a baseline of declining fertility will raise output per capita by 5.6 percent at a horizon of 20 years, and by 11.9 percent at a horizon of 50 years (Ashraf et al. 2013). Karra et al. (2017) add new channels to the effects identified by Ashraf et al. (2013) by incorporating four previously ignored channels: (i) the effect of fertility on savings; (ii) a feedback from education to fertility; (iii) the effect of fertility on health; and (iv) the effect of a more realistic three-sector model with market imperfections. This finds that lowering the total fertility rate by one child per woman almost doubles income per capita by 2060, which is twice the size of the effect found by Ashraf et al. (2013). Drawing on previous research, the World Bank’s 2015 report “Africa’s Demographic Transition: Dividend or Disaster” identified four features of the third stage of the demographic transition favorable for economic growth: (i) rising share of the working- age population; (ii) increasing physical capital per worker; (iii) rising Total Factor Productivity (TFP); and 44 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE Box 3.1 continued (iv) rising human capital per worker due to rising education. In seminal empirical work seeking to establish causal linkages between demographic change and economic growth in Asia between 1965 and 1990, Bloom and Williamson (1998) find that the overall rate of population growth had little effect on economic growth, but that changes in life expectancy, age structure, and population density have had a significant impact on economic growth rates. FIGURE 3.3. Nigeria's adolescent fertility rate is significantly higher in the Northern States and is high compared with its income level Panel A. Age-specific fertility rate for women age 15–19, by Panel B. Adolescent fertility rate (2019) State 160 Chad Sokoto Katsina Jigawa 140 Zamfara Yobe Kano Borno Kebbi 120 Zambia Burkina Nigeria Kaduna Bauchi Gombe 100 Faso Niger Togo Adamawa 80 Bangladesh Federal Plateau Kwara Capital Territory Nasarawa Ghana Oyo 60 Namibia Taraba Egypt, Arab Rep. Ekiti Kogi Indonesia Osun Botswana Ogun Ondo Benue 40 Pakistan Rwanda Edo Enugu Vietnam Lagos Russian Federation Anambra Ebonyi 20 Cross Delta Imo Abia River Adolescent Birth Rate per 1,000 Akwa Rivers Ibom 0 Bayelsa 18 118 218 0 5,000 10,000 15,000 20,000 25,000 30,000 GDP per capita (PPP, constant 2017 international US$, 2019) Source: World Bank calculations using data from World Development Indicators. Realizing the importance of accelerating the sluggish dimensional, multisectoral collaboration to ensure that demographic transition in Nigeria, the Nigerian all aspects of Nigerian society move forward together. Population Commission (NPC) devised and launched its first Demographic Dividend Effort Index (DDEI) This note shows that Nigeria needs to direct its report in 2020, which measures progress and takes resources and strategic focus toward adolescent stock of recommendations in different sectors.61 The girls to achieve the objective of a high DDEI score, DDEI consists of six pillars across which Nigeria scores ultimately translating into the harnessing of the an overall score of 5.4 out of 10, which translates into a demographic dividend agenda. Demographic moderate level of effort toward cultivating and harnessing transition is a necessary precursor to realizing the the demographic dividend agenda. The DDEI further demographic dividend. Nigeria is currently in a pre- disaggregates these scores based on sectoral performances dividend stage with high levels of fertility and must and shows that Nigeria devotes a moderately high level prioritize investments in the well-being of adolescent of effort to government and economic institutions and girls to turn the window of demographic opportunity the education sector; a moderate level of effort in the into a demographic dividend. Prioritizing investment family planning and maternal and child health sectors; in adolescent girls and women and providing them and moderately low levels of efforts in the labor market with opportunities in the labor market will ensure that and women’s empowerment sectors. Overall, the DDEI the next generation of young adults is healthier, better proposes that achieving progress will require multi- educated, and more able to contribute to economic growth and development. 61 Available at: https://demographicdividend.org/ddeffortindex/. Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 45 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 3.2  Constraints to Demographic to adolescent well-being and early marriage, teenage Transition through the Lens of Nigeria’s pregnancy, and low educational attainment are Adolescent Girls established with recent data, where available. Adolescent girls are viewed as a key demographic group to target to break the intergenerational 3.2.1  Demand-Side Constraints transmission of poverty in developing countries (Levine et al., 2008). Preceding analysis from Nigeria  A high poverty rate is one of the strongest supports this view. With adolescents likely to be the determinants for early marriage and high fertility second-largest demographic group after young children rates among adolescent girls. Prevalence of early for the foreseeable future, policies that help adolescent marriage and teenage pregnancy in Nigeria is much girls realize their potential by reducing early marriage higher in the lower wealth quintiles. FIGURE 3.5 and childbearing, and improving their education and (Panel A) shows that, compared with 68 percent of skills to enter the labor force successfully, will eventually women aged 20–49 who got married before the age of help Nigeria kickstart its stalled demographic transition 18 in the poorest quintile, only 17 percent of women in process. Under demand-side factors, three constraints the richest quintile got married before the age of 18 in are assessed: (i) economic deprivation and poverty; 2016/17. Similarly, compared with almost 200 births (ii) constraining social norms that curtail demand for per 1,000 women aged 15–19 in the poorest quintile, family planning; and (iii) low child health outcomes Nigeria reported 35 births per 1,000 women aged 15–19 raising the need for more children. Similarly, under in the richest quintile. supply-side factors, four constraints are assessed: (i) the lack of access to quality secondary schools; (ii) inequity A high poverty rate also constrains demand for in access to quality health and reproductive services; adolescent girls’ education. Of all the Nigerians living (iii) the lack of opportunities in the labor market; below the national poverty line in 2018/19, around and (iv) insufficient national laws and regulations. 76 percent lived in the North-Central, North-West, The linkages of demand- and supply-side constraints and North-East regions (World Bank, IFC and MIGA, FIGURE 3.4. Adolescent well-being, demographic transition, and its consequences for potential demographic dividend in Nigeria 1 Adolescent girls in Nigeria are 2 Poor outcomes for adolescent girls 3 Stalled demographic transition delays constrained by demand and supply stalls the demographic transition prospects for demographic dividend side factors that hinder their well-being process as the vicious cycle of early as dependency ratios remain high and and prevent them from realizing their marriage, teenage pregnancy and low human capital outcomes continue to potential educational outcome reinforce each suffer other Demand side constraints: Less than 10 percent 43 percent of of Nigeria’s secondary Ÿ Poverty prevents low-income households from Nigeria’s girls school age females HIGH enrolling girls in schools get married were attending Ÿ Constraining social norms and beliefs prevent before the age of 18 secondary school Ÿ Dependency ratio demand for modern contraceptives or higher in 2016/17 Ÿ Poverty Ÿ High child mortality and low child health outcomes raise the number of desired children Ÿ Gender inequality Early Low marriage education Supply side constraints: attainment Ÿ Lack of quality schools for adolescent girls pushes them out of school and raises their chances of early fertility Ÿ Lack of quality health and reproductive services Teenage Ÿ Human capital outcomes increases child mortality and illness and intensifies pregnancy desire/need for additional children Ÿ Economic growth LOW Ÿ Lack of job market opportunities for school to work Ÿ Women empowerment transition accelerates early marriage and Four of Nigeria’s Northern States childbearing (Bauchi, Jigawa, Zamfara, and Katsina) have Ÿ National laws and regulations are unable to deter adolescent fertility rates higher than that of early marriage and childbearing the country with the highest AFR (Niger) Adopted from: Bergstrom, K. and Ozler, B., 2021. Improving the Well-Being of Adolescent Girls in Developing Countries. 46 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE 2020). Female educational attainment—one of the Education Program aims to provide nine years of free, strongest predictors for fertility rates—is much lower compulsory, and universal primary education for all among females in the North compared with females children, the three years of senior secondary education in the South (FIGURE 3.6, Panel A). In 2016/17, the are not free. In 2015, around 18 percent of Nigerian percentage of Nigerian girls of secondary school age girls aged 6–16 who were out of school reported the attending school was just 9.3 percent in the poorest monetary cost of schooling as being one of the main wealth quintile compared with 80.6 percent in the constraints.62 Another constraint identified by families richest quintile, a staggering gap of 70 percentage points for not sending their daughters to school was losing (FIGURE 3.6, Panel B). For poor households and their a key income earner who is critical to meeting their families, it is difficult to cover the direct and indirect basic family needs, as girls are often more involved in costs of schooling. Though the Nigeria’s Universal Basic generating family income in rural areas. FIGURE 3.5. Early marriage and teenage pregnancy rates in Nigeria in 2016/17, by wealth quintile Panel A. Marriage before age of 18, by wealth quintile Panel B. Adolescent fertility rate, by wealth quintile 70 200 180 60 160 50 140 120 40 100 30 80 20 60 40 10 20 0 0 Poorest Second Third Fourth Fifth Nigeria Poorest Second Third Fourth Fifth Nigeria Source: UNICEF, Multi-Indicator Cluster Survey (MICS) 2016/17. FIGURE 3.6. Percentage of Nigerian secondary school children age attending secondary school or higher, by location and wealth quintile, 2016/17 Panel A. Percentage of female children of secondary school Panel B. Percentage of female and male children of age attending secondary school or higher (adjusted net secondary school age attending secondary school or higher attendance ratio), Nigeria, 2016–17 (adjusted net attendance ratio), Nigeria, 2016–17, by wealth quintile 80 Sokoto Katsina Jigawa 70 Zamfara Yobe Kano Borno Kebbi 60 Bauchi Kaduna Gombe 50 Niger Adamawa Federal Plateau 40 Kwara Capital Territory Nasarawa Oyo Taraba 30 Ekiti Kogi Osun Benue Ogun Ondo 20 Edo Enugu Lagos Anambra Ebonyi Cross Percentage attending secondary 10 Delta Imo Abia River school, female Akwa Bayelsa Rivers Ibom 0 16.3 49.85 83.4 Poorest Second Third Fourth Richest Overall J Female J Male Source: UNICEF, Multi-Indicator Cluster Survey (MICS) 2016/17. 62 2015 Nigeria National Education Data Survey (NEDS). Available at: https://shared.rti.org/content/2015-nigeria-national-education-data-survey- neds. Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 47 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Compared with the regional average, or structural and and Senegal, and lower than averages for low-income aspirational peers, the use of modern contraceptive countries (29 percent). methods for family planning in Nigeria is low. FIGURE 3.7 (Panel A) shows that only 12 percent of Demand for family planning is especially low for Nigerian women aged 15–49, who were married in 2018, adolescents between the ages of 15 and 19. FIGURE use modern contraceptive methods for family planning, 3.8 (Panel A) shows the trends in wanted and unwanted lagging the regional average in SSA (27.5 percent) and fertility in Nigeria between 1990 and 2018, and shows considerably behind some of its aspirational peers, that the gap between actual and wanted fertility is very such as South Africa (54 percent).63 The percentage of small, reflecting both a desire for large families and Nigerian women using modern contraceptive methods relative realization of desired family size. Similar to the has remained largely the same over the past decade, use of modern contraceptive methods, there is national increasing from 10 percent in 2008 to 12 percent in variation in demand for family planning. Fifty percent 2018. Compared with the national average, and similar of married women who have more than secondary to trends in TFR, there is substantial variation across education demand family planning services compared geo-political Zones and States in the use of modern with 20 percent of married women with no education contraceptive methods. For example, 24 percent of (FIGURE 3.8, Panel B). Total demand for family married Nigerian women aged 15–49 in the South- planning is 15 percent among married adolescents West use modern contraceptive methods compared with between the ages of 15 and 19. According to the NDHS, 6 percent in the North-West (FIGURE 3.7, Panel B). It the ideal number of children among adolescents in is, however, important to note that even in the South, Nigeria in 2018 is 5.5, higher than the current national the modern contraceptive prevalence among married TFR of 5.3. For Nigeria to make improvements to its women ranges between 13 and 24 percent, which is stalled demographic transition process, it is important to lower than the national averages in Burkina Faso, Ghana, address the prevailing social norms that limit demand for family planning services. FIGURE 3.7. Nigeria has very low prevalence of modern contraceptives nationally and especially in the North East and North West Panel A. Countries in Africa by contraceptive prevalence, Panel B. Contraceptive prevalence, any modern method any modern method (percent of married women ages (percent of married women ages 15–49), by zones, 2018 15–49), last available year Percent of married women 25 Morocco Algeria Libya Egypt 20 Mauritania Mali Niger Sudan Eritrea Senegal Chad Burkina Guinea Faso 15 Nigeria Somalia Sierra Central South Ethiopia Leone African Sudan Cameroon Republic Cote Ghana Uganda d'Ivoire Gabon Democratic Kenya Republic 10 Republic of of Congo Tanzania the Congo Angola Mozambique Zambia 5 Zimbabwe Madagascar Namibia Botswana Prevalence of modern contraceptives South 0 Africa North North North South South South Nigeria 0.9 33.35 65.8 Central East West East South West overall Source: World Bank calculations based on World Development Indicators (Panel A) and Nigeria Demographic and Health Surveys (NDHS), 2018 (Panel B). 63 DHS, most recent available year is 2018 for Nigeria, 2017 for SSA, and 2016 for South Africa. Available at: https://data.worldbank.org/indicator/ SP.DYN.CONM.ZS?most_recent_value_desc=false. 48 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 3.8. Most fertility in Nigeria is wanted fertility with low demand for family planning, especially among adolescents Panel A. Trends in total wanted fertility and unwanted Panel B. Total demand for family planning (met and unmet) fertility, 1990–2018, Nigeria of women aged 15–49, by education level and wealth quintile 6 0.2 60 0.4 0.4 0.3 0.5 50 5 40 4 30 3 5.8 5.3 5.3 5.2 4.8 20 2 10 0 1 y y ar n t nd ird th st ll 19 n es ra ar ar io nd tha he y ur co Th 5– ve at or im nd Fo ic uc Se co e Po ,1 O Pr co R r seMo ed es Se 0 Ag o 1990 NDHS 2003 NDHS 2008 NDHS 2013 NDHS 2018 NDHS N J Total wanted fertility J Unwanted fertility J Married women J All women Source: Nigeria Demographic and Health Surveys (NDHS), 2018. FIGURE 3.9. Nigeria has the highest U5MR in the world despite seeing rapid decline in the past 50 years, largely due to the high prevalence of childbearing among adolescents Panel A. Neonatal, infant, child, and U5MR by type and Panel B. U5MR (per 1,000 live births), Nigeria and mother's age at birth, Nigeria, 2018 comparator countries/region 160 300 281.4 140 250 211.8 120 209.5 200 183.1 100 150 136.0 80 117.2 60 100 40 50 20 0 0 <20 20–29 30–39 40–49 1970 1980 1990 2000 2010 2019 J Neonatal mortality J Postneonatal mortality J Infant mortality ▬ NGA ▬ SSA ▬ PAK ▬ GHA J Child mortality J Under-5 mortality ▬ RWA ▬ BGD ▬ IDN Source: World Bank calculations based on Nigeria Demographic and Health Surveys (NDHS), 2018 (Panel A) and World Development Indicators (Panel B). While there has been progress on reducing the infant The risk of neonatal, post-neonatal, infant, child, and mortality rate (IMR) and the under-five mortality rate U5MR is substantially higher for adolescent mothers. (U5MR), Nigeria is still among the countries with U5MR in 2018 was 160 per 1,000 live births among the highest IMR and U5MR rates, causing women to adolescent mothers compared with 120 among women have more children in the hope that more of them will aged 20–29 and 124 among women aged 30–39. survive beyond childhood. Nigeria’s U5MR declined Similarly, the IMR—defined as the number of deaths from 183 per 1,000 live births in 2000 to 117 per 1,000 of children under one year of age and expressed per live births in 2019. Nonetheless, Nigeria has the worst 1,000 live births—was substantially higher at 85 among U5MR of any country in the world. In the North-West, births by adolescents compared with 59 among the 20– U5MR is 187 per 1,000 live births, higher than the 29 age group and 64 among the 30–39 age group. In national average in 2000. developing countries such as Nigeria, wanted fertility Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 49 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 often depends on infant and child mortality rates, as 3.2.2  Supply-Side Constraints families consider the need for additional children to replace potential losses. Therefore, when a country Close to one in four (23 percent) of primary schools decreases its infant and child mortality rates, it can in Nigeria’s North do not have a junior or senior trigger a fertility decline as more children survive into secondary school within 4–5 km in their communities adulthood (Conley et al., 2007). Not only are women compared with 5 percent of primary schools in who begin childbearing early more likely to have more Southern Nigeria. The expansion of secondary school children throughout their lives, but early childbearing infrastructure has not kept pace with the rapid growth also poses a greater risk of death, disease, and illness for in primary enrolment, or the rising transition rates the mother and their children, constraining their ability to secondary schools.65 Nationally, there is an acute to contribute to society. shortage of secondary schools with only 30,579 junior secondary schools and 21,688 senior secondary schools More than one-third of Nigeria’s children under 5 are compared with 131,000 primary schools, implying stunted, severely denting their hopes of realizing their a ratio of about 4.3 primary schools for every junior full potential in the future. In 2018, close to 37 percent secondary school and 6.1 primary schools for every of children between the ages of 6 and 59 months in senior secondary school.66 The lack of secondary schools Nigeria were stunted, or too short for their age.64 The is significantly greater in the North, with an average of prevalence of stunting widely varies across geopolitical eight primary schools for every secondary school. zones. In the North-West, the prevalence of stunting is 57 percent, or 20 percentage points more than the The COVID-19 pandemic has further affected access national average. In contrast, the prevalence of stunting to schooling among Nigeria’s adolescents, with girls in is 18 percent in the South-East, less than half of the Nigeria’s North most likely not to return once schools national average. These findings show a high degree of had reopened. A recent World Bank study found that correlation between the status of women in the North the recent wave of lockdown measures implemented in where there is high prevalence of early marriage and response to the COVID-19 pandemic reduced children’s teenage pregnancy, and the low level of educational school attendance after the reopening of schools (Dessy attainment among girls. With two out of every five et al., 2020). Children aged 12–18 were less likely children under the age of 5 stunted, Nigeria’s prospects to return compared with children in the earlier age- for achieving its demographic dividend in the near term group. More strikingly, when lockdown measures look even more distant, as studies consistently show that were interacted with the gender of the respondent stunting during early years of life is associated with lower and the geopolitical zone, estimation results show that educational attainment, productivity, and wages during COVID-19 lockdown measures disproportionately adulthood (McGovern et al., 2017). reduce girls’ school attendance probabilities in the North-West zone. Adolescent mothers are less likely to give birth in the presence of skilled providers and often cite distance to health facilities and a lack of providers as barriers 64 Nigeria Demographic and Health Surveys (NDHS), 2018. 65 Nigeria’s education system follows a 6-3-3-4 structure where a potential student going through the structure would spend six years in primary school, three years in junior secondary school, three years in senior secondary school, and four years in a tertiary institution. More available at: https://unesdoc.unesco.org/ark:/48223/pf0000149503. 66 Recent school level data at the senior secondary level are not available. The information on the number of senior secondary schools comes from the 2015/16 EMIS school census, which shows 21,688 senior secondary schools nationally.. 50 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 3.10. Nigeria's youth faced unemployment to accessing health services. Between 2008 and 2018, rate of 53 percent at the end of 2020 the percentage of Nigerian women giving birth in the Unemployment and Underemployment rates, by age-group presence of a skilled birth attendant increased from 39 and gender, Q4 2020 Percent to 43 percent. Despite this improvement, fewer than two 60 in five newborns delivered in Nigeria in 2018 were born in a health facility.67 In the past five years preceding the 53.4 50 survey in 2018, only 31 percent of adolescent mothers 40 delivered in the presence of skilled birth attendants 37.2 35.2 33.3 30 compared with 46 percent in the 20–34 age group 31.8 27.2 25.9 25.7 25.4 and 43 percent in the 35–49 age group,68 significantly 24.4 24.2 23.6 22.8 20 21.8 21.6 19.8 increasing the risk of death and illness for both the 10 child and the mother. In a study of utilization of skilled birth attendance of 400 women in Northern Nigeria, a 0 Nigeria 15–24 25–34 35–44 45–54 55–64 Male Female overall lack of health-care providers and a lack of supplies and J Unemployment J Underemployment equipment were found to be major barriers to accessing Source: National Bureau of Statistics (NBS). skilled birth attendance along with poverty (Adewemimo et al., 2014). Not only do poor labor market outcomes discourage young women from participating in the labor market Adolescents and young girls in Nigeria face limited and increase their likelihood of having more children, labor market opportunities in their school-to- but they also detract from their contribution to the work transition. According to the National Bureau economy, reducing the prospects for a demographic of Statistics (NBS), Nigeria’s youth aged 15–24 faced dividend. Poor female labor market outcomes and unemployment rates of 53 percent at the end of high fertility rates reinforce each other. Higher women’s 2020 (FIGURE 3.10).69 Both unemployment and labor force participation, especially when combined underemployment rates were also higher for women. with secondary education completion, is associated When women do work, they consistently earn less than with lower fertility rates, while higher fertility rates tend men: their hourly wages are 22 percent lower than men’s, to decrease women’s work rates (Bloom et al., 2009). women farmers produce 30 percent lower agricultural Higher earnings for women in the labor force have outputs on the plots they manage than men, and their the potential to further decrease fertility by increasing businesses earn profits that are 66 percent lower than the opportunity cost of each additional child. It is male-owned businesses (World Bank, 2022). Recent therefore critical to promote policies that enable young research shows that unemployment can accelerate the women in Nigeria to gainfully participate in the labor transition to motherhood for women (Andersen and market by: (i) ensuring that girls remain in school and Özcan, 2021). In Nigeria, about 65 percent of working transition into adulthood with the skills they need to be women in households with children under 5 worked productive; and (ii) addressing the main constraints to fewer than 40 hours per week, compared with 57 percent women’s earnings and labor force participation. of working women in households without children under 5 (World Bank, 2021). 67 Nigeria Demographic and Health Surveys (NDHS), 2018. 68 Ibid. 69 NBS defines unemployment rates as the percentage of the labor force population who could not find at least 20 hours of work in the reference period. Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 51 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Despite the existence of national laws and the aged between 15 and 19 already married or in union in ratification of relevant international and African 2016/17. Compared with its aspirational and structural treaties, child marriage continues to plague Nigerian peer countries, the prevalence of early marriage in society with little decline in some states. Nigeria Nigeria is higher than what is predicted by its income established the Child Right Act in 2003 to bestow the level (FIGURE 3.11, Panel B). Even more worryingly, same human rights afforded to Nigerian citizens by the the MICS 2016/17 data also show that around 1999 Constitution to its children. Part III of the Child 16 percent of Nigerian girls and women currently aged Rights Act includes protection from child marriage, as 15–19 were married before the age of 15. It is estimated well as the punishments for the act to the adult parties that child marriage costs Nigeria about US$7.6 billion in involved. However, only 26 out of Nigeria’s 36 states lost earnings and productivity every year (World Bank, have so far adopted the Act, while 10 Northern states— 2018). where child marriage rates continue to be high—have yet to adopt the Act (Human Rights Watch, 2021). Even The inability of Nigeria’s law and regulations in some of the Northern states that have adopted the to prevent child marriage also stems from the act, the age of majority70 has been omitted from the Act, incongruity between different parts of the making it inadequate to protect children from forced Constitution. While the Child Rights Act of 2003 marriages. stipulates the minimum age of marriage to be 18, the Constitution on the other hand says that “any woman As a consequence, Nigeria has one of the highest who is married shall be deemed to be of full age" (CNN, rates of child marriage in the world, with around 2019). Efforts to remove this loophole have so far met 44 percent of Nigerian women currently aged between with stiff opposition in the Nigerian senate, as lawmakers 20 and 49 married before the age of 18.71 FIGURE and religious leaders in the Northern states often cite 3.11 (Panel A) shows that Sokoto, Zamfara, Katsina, Islam’s lack of any age requirement for betrothal as a Bauchi, and Jigawa have the highest prevalence of early justification for early marriage (Human Rights Watch, marriage, with more than 40 percent of girls currently 2021). FIGURE 3.11. Nigeria has some of the highest prevalence of early marriage in the world with the practice of early marriage rampant in many of Nigeria’s Northern states Panel A. Percentage of women aged 15–19 currently Panel B. Percentage of females aged 20–24 married before married or in union, by State, 2016/17 the age of 18 70 Sokoto Katsina Chad Jigawa 60 Zamfara Yobe Kano Borno Kebbi Bangladesh 50 Burkina Faso Kaduna Bauchi Nigeria Gombe Niger 40 Adamawa Federal Plateau Kwara Capital Territory Nasarawa 30 Zambia Oyo Togo Taraba Ekiti Kogi Osun Benue 20 Pakistan Ghana Egypt, Arab Rep. Ogun Ondo Indonesia Edo Enugu Vietnam Lagos Anambra Ebonyi 10 Cross Rwanda Namibia Delta Imo Abia River Percentage of women aged 15–29 currently married or in union Akwa 0 Bayelsa Rivers Ibom 2.1 28.5 54.9 0 5,000 10,000 15,000 20,000 GDP per capita (PPP, constant 2017 international US$, 2019) Source: UNICEF, Multi-Indicator Cluster Survey (MICS) 2016/17, and World Development Indicators. 70 Age of majority is defined as a threshold for adulthood for a minor to become an adult and assume legal responsibility. 71 UNICEF, Multi-Indicator Cluster Survey (MICS) 2016/17. 52 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE 3.3  Policy Measures to Accelerate the Policy Message 1: Support measures Demographic Transition to Harness the that help keep girls in school to delay Demographic Dividend marriage/pregnancy and improve learning outcomes To accelerate Nigeria’s sluggish demographic transition and to realize the demographic dividend, There is an urgent need to expand access to secondary this note proposes policy recommendations around schools in Nigeria and make secondary education four complementary pillars. Together, the four pillars free for poor households that find it hard to cover of policy recommendations aim to achieve two key the direct and indirect costs of secondary schooling. objectives to take advantage of the demographic window Although the Nigeria’s Universal Basic Education of opportunity in the near term. First, the policy Program aims to provide nine years of free, compulsory, measures will help Nigeria to accelerate the demographic and universal primary education for all children, the transition by reducing high fertility and child mortality three years of senior secondary education are not free. rates, causing a shift in the age structure. Second, For poor families, sending their daughters to school the measures will allow Nigerian youth, particularly means losing a key income earner who is critical to Nigerian girls, to contribute more effectively to Nigeria’s meeting basic family needs, as girls are often more economy as they are equipped with the necessary skills involved in generating income for the family in rural and capabilities to participate in society. The four areas. To keep girls in school will require removing the pillars are presented below (in summary). FIGURE direct cost of schooling and incentivizing parents for 3.12 illustrates the mutually reinforcing nature of these the lost income. In terms of school access, the lack of policy actions and how targeting support to adolescent secondary schools is significantly greater in the North, girls can accelerate progress across all four pillars. The with average of eight primary schools for every secondary key policy options table highlights the need for the school. For girls to transit or complete secondary school, policies proposed, the short- and medium-term actions the FGN must provide the necessary infrastructure to to support the policies, and the likely impact the policy create safe learning spaces in their communities. measures will have. FIGURE 3.12. Targeting adolescent girls with holistic support is critical to reducing fertility and accelerating the demographic transition in Nigeria Accelerating Demographic Transition… 1 Support measures that keep girls in 2 Expand access to and demand for family 3 Increase investments in maternal and school planning child health Keeping girls in school until they complete Expanding access to and demand for family Increasing investments in maternal and secondary education (or higher) delays planning addresses informational and child health, and in turn reducing child early marriage and childbearing, reducing financial constraints to contraceptive use, mortality, reduces the desired number of family size, expands demand for family addressing unwanted fertility children and improves health outcomes for planning, and increases investments per adolescent girls and their future children child on health Examples of short-term measures Examples of medium-term measures Ÿ Provide cash transfers and supplementary Ÿ Engage community elders and leaders to services address discriminatory norms Ÿ Expand immunization 4 Boost women’s labor force participation Ÿ Expand supply of quality secondary Ÿ Provide information on benefits of family and earnings schools planning Expanding women’s economic opportunities Ÿ Improve access to quality technical, reduces fertility by increasing the opportunity vocational, and socioemotional skills cost of women’s time training for women ...to harness the Demographic Dividend in Nigeria Note: World Bank illustration. Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 53 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Policy Message 2: Expand access to and health measures that provide cost-effective preventive demand for family planning interventions to substantially reduce the U5MR must be prioritized.72 Nigeria needs to implement strategies that improve access to, and increase the demand for, family planning services. There is need to prioritize Policy Message 4: Support programs and improvement in demand for family planning—with interventions that address constraints current unmet need for family planning low across to women’s labor force participation and the country—by focusing on both inter-personal increase their earnings and societal behaviors and norms, and engaging with women’s groups and community, religious and Nigeria needs to prioritize interventions that address traditional leaders. Other policies identified are the need constraints to women’s economic empowerment, to provide information on the pros and cons of different including helping the school-to-work transition for methods, and the targeting of family planning vouchers adolescent girls. There is growing global evidence that to adolescent girls. shows that ensuring economic opportunities for women is an important entry point for reducing high fertility and early childbearing, and ensuring better education, Policy Message 3: Increase investments health, and nutrition outcomes for children. Measures in multi-sectoral interventions that that provide adolescent girls with a comprehensive improve maternal and child health set of vocational, socio-emotional, and technical tools outcomes to navigate the labor market seem to hold the most promise. Increasing fiscal resources available for health and social protection programs that have demonstrated evidence in reducing child mortality rates and stunting, and improving maternal mortality rates, will lower the need for more children. In 2019, Nigeria’s low public expenditure on education and health reflects its current standing as the country with the 6th lowest Human Capital Index in the world (World Bank, 2020b). There is a need to reduce the high IMR and U5MR, and to increase the utilization of maternal health services, especially among adolescent girls. Concomitantly, there is a need to expand interventions that reduce childhood stunting, as stunting during the early years of life is strongly associated with lower productivity and earnings during adulthood. Despite the FGN launching several new safety net programs in recent years, social protection coverage remains low, even if well targeted. Social protection measures that improve the demand for utilizing human capital services and 72 These include including maternal tetanus toxoid vaccination, exclusive breastfeeding, clean cord care, kangaroo mother care, immunizations, vitamin A supplementation, prevention of mother-to-child transmission of HIV, and expansion of the use of insecticide-treated mosquito nets. 54 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options Which Reforms Are Critical What Impact These Why Reforms Are Needed Short-Medium Term Medium-Long Term Reforms Could Have (6–18 months) (18–36 months) Policy Message 1: Support measures that keep girls in school. • Less than 10 percent • Provide safe learning • Advocate for reforms, • Decreases in fertility of secondary school spaces to adolescent including the enaction and increased use age girls attend girls, in which they of a law for free and of contraception. A secondary schools meet inside or outside compulsory 12 years multi-faceted program in the lowest wealth of school to socialize of education for girls in for girls in Uganda, quintile compared and receive vocational Nigeria. (Empowerment to 80 percent in the and life skills training • Implement social and Livelihoods for richest quintile (including on sexual and behavior change Adolescent Girls – ELA) • Close to one in and reproductive communication including combining clubs with four (23 percent) of health), such as in the community-level vocational and life- primary schools in World Bank supported dialogue, campaigns at skills trainings led to Nigeria’s North do Adolescent Girls the federal, state, and decreases in fertility not have a junior or Initiative for Learning community levels to and increased use of senior secondary and Empowerment change discriminatory contraception (Bandiera school within 4–5 km project. social norms to increase et al., 2013). in their communities • Expand construction of demand for girls’ • Increase in school compared to 5 percent community secondary education and reduce enrolment. Bergstrom of primary schools in schools and / or the prevalence of child and Ozler review Southern Nigeria expansion of primary marriage through. evidence on school schools to include junior • Encourage 10 remaining construction and find and senior secondary States who are yet that school construction schools and the to adopt the Child can lead to very large renovation of existing Rights Act of 2003 to gains in educational secondary schools increase and enforce attainment in areas to provide conducive the minimum age of where schools are far learning environment in marriage of 18 for girls. away. The also find the Northern Zones of promising impact on the country. reduced/delayed fertility (Bergstrom and Ozler, 2021). Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 55 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (contniued) Which Reforms Are Critical What Impact These Why Reforms Are Needed Short-Medium Term Medium-Long Term Reforms Could Have (6–18 months) (18–36 months) Policy Message 2: Expand access to and demand for family planning. • Total demand for • Provide vouchers to • Engage community • Increased demand for family planning in adolescent girls to leaders in the North family planning services. Nigeria is 15 percent access family planning and women’s groups to A family planning among married services. address societal norms (FP) program in India adolescents between • Provide information on and behaviors leading that offered women the ages of 15 and 19 the benefits of delaying, to low uptake of family voucher to seek care • Prevalence of modern spacing, and limiting planning services. and services with their contraceptive method births, and on the pros peers, found it increases for women aged 15–49 and cons of different visits to a FP clinic for is just 12 percent types of family planning FP and reproductive methods, especially in health services (Anukriti, the North. Herrera-Almanza and Karra, 2021). • Increased use of family planning measures. In Kenya, a 45-minute information session delivered by an outside facilitator with a focused message on the heightened risk of HIV faced by girls having sex with older partners was effective at reducing unprotected sex and consequently pregnancy among adolescent girls (Dupas, 2011). Policy Message 3: Increase investments in multi-sectoral interventions that improve maternal and child health outcomes. • Nigeria has the • Expand immunization • Supplement the delivery • Reduction in childhood third-highest infant and vitamin-A of cash transfers with stunting. The Child mortality rate and supplementation in advice and counselling Development Grant the highest U5MR lagging areas. on nutrition and health. Program (CDGP), mortality rate in the • Expand and provide a multi-faceted world unconditional cash program that provided • Close to 37 percent transfers to pregnant cash transfers with of Nigerian children women during their information to extreme between 6 and 59 pregnancy and until the poor households months are stunted child reached age 2. lead to large and sustained improvements in children’s anthropometric and health outcomes, including an 8 percent reduction in stunting four years post-intervention (Carneiro et al., 2020). 56 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (contniued) Which Reforms Are Critical What Impact These Why Reforms Are Needed Short-Medium Term Medium-Long Term Reforms Could Have (6–18 months) (18–36 months) Policy Message 4: Support programs and interventions that address constraints to young women’s labor force participation and increase their earnings. • Adolescents and • Provide labor market • Encourage women to • Increase in productivity young girls in Nigeria interventions targeting get involved in male- among women farmers. face limited labor women and youth with dominated occupations/ A psychology-based market opportunities comprehensive job sectors by broadening training called Personal in their school to work facilitation support by the range of programs Initiative led to increased transition. In 2020, the providing vocational and offered in technical profits for women unemployment rate socioemotional skills colleges aimed at entrepreneurs in Togo among youth was 20 training. digital jobs and trades and to increases in area percent • Support adolescent girls’ with good employment cultivated, input use • A significant portion of by providing mentorship prospect for women, and adoption of cash young Nigerian women programs and removing integrating socio- crops among women are unable to make specific constraints to emotional skills training farmers in Mozambique the school-to-work participation in labor in the curriculum, (Campos et al., 2018). transition: boys and market programs, such supporting the • Increased participation girls are equally likely as transportation costs recruitment of female of women in male- to either attend school or free childcare. teachers and instructors, dominated sectors. or work until the age and improving facilities The Nigeria Business • Deliver comprehensive in technical colleges of 14, after which productive packages to Process Outsourcing women’s participation to make them more Youth Employment ultra-poor women that attractive to females. drops combines grant, training, project provided and linkages to markets • Sustained policy information and and services. engagement to communications promote reforms technology training • Establish vocational and boosting women’s labor which significantly STEM programs to help force participation, increased the likelihood girls build skills and to including enacting a of women working in easily access the labor law against gender- those sectors, especially market. based discrimination those who were in work and laws initially biased against around parenthood, associating women with as well as lifting professional attributes mobility restrictions and (Croke et al., 2017). restrictions on sectors of work. 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Washington, DC: World protect-girls-ending-child-marriage# Bank. 58 Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb TECHNICAL NOTES  |  CHARTING A NEW COURSE Karra, M., Canning, D. and Wilde, J. 2017. “The World Bank; International Finance Corporation; effect of fertility decline on economic growth in Multilateral Investment Guarantee Agency. Africa: A macrosimulation model.” Population 2020. Country Partnership Framework for and Development Review 43: 237–263. the Federal Republic of Nigeria for the Period Levine, R., Lloyd, C., Greene, M. and Grown, C. 2008. FY21–FY25. Washington, DC: World Bank. “Girls Count: A global investment & action World Bank. 2020a. Nigeria on the Move: A Journey agenda.” Washington, DC: Center for Global to Inclusive Growth. Systematic Country Development. Diagnostic. Washington, DC: World Bank. 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Note 3: Investing in Adolescent Girls to Defuse Nigeria’s Demographic Time Bomb 59 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment Authors: Rajul Awasthi and Elijah Kimani TECHNICAL NOTES  |  CHARTING A NEW COURSE Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment Summary: Nigeria is Africa’s largest economy but it has revenue-yielding sources such as increasing “sin taxes”, the lowest non-oil tax-to-GDP ratio on the continent, at charging fees for electronic money transfers, rationalizing just 6 percent as of 2019. Tax revenues are necessary to tax expenditures, removing loopholes in tax laws, and ensure essential services, provide security to citizens, help improving tax compliance by reinforcing revenue tackle hunger and poverty, and deliver critical health and administration. As Nigeria tries to “build back better” education services. The COVID-19-related economic after the COVID-19 crisis, the approach to revenue slowdown, coupled with the plunge in oil prices in 2020, mobilization needs to be more strategic: not just taxing brought into sharp focus the need to increase non-oil more but taxing better; not just how much to collect, revenue. In addition, Nigeria’s inability to take advantage but how to collect, what to collect, and from whom. of favorable oil prices in 2022 given the continued subsidizing of petrol means that the FGN urgently needs to find ways to boost non-oil revenues. Given that 4.1  Africa’s biggest economy also has the economy is still recovering from the COVID-19 Africa’s lowest tax-to-GDP ratio: Nigeria downturn, policy and administrative measures that are must mobilize far more revenue if it is carefully calibrated to grow revenues without negatively to capitalize on its immense economic impacting investment are called for. While ruling out potential any rate increases in traditional ad valorem taxes such as the value-added tax (VAT) to foster economic recovery, To achieve sustainable and inclusive growth, build there is an opportunity to fully implement the already a resilient economy, and achieve the aspirations of existing tax policies and reform tax administration to its people, Nigeria must address its perennially low seal compliance gaps. There is potential for harvesting revenue mobilization. Its 2021 non-oil tax-to-GDP FIGURE 4.1. Nigeria’s revenue collection is the FIGURE 4.2. Nigeria’s high revenue potential lowest among SSA peers stands out among global peers Total revenue compared with SSA peers, percent of GDP Revenue as a share of GDP, percent 50 40 45 35 40 South Africa 35 30 Brazil Russia 30 25 Colombia 25 Moving to the median Rwanda Egypt 20 more than doubles 20 Kenya Peru Nigeria’s revenues Mexico Malaysia 15 Cameroon 15 Tanzania Ghana 10 Uganda India Indonesia Congo, DR Cote d'Ivoire 5 10 Nigeria 0 5 O AM G BWF RWA A B N N N R IV A A A E D N A ZA ZM TZ H G ZW SE KE D M O SD G LS O C 2.5 3.0 3.5 4.0 4.5 G M U N C N C C Log of GDP per capita (2010 US$) Q Regional Q Structural peers Q Aspirational peers Source: Federal Inland Revenue Service (FIRS) and IMF Revenue Statistics. Source: FIRS and IMF Revenue Statistics. Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 61 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 ratio of 6 percent was about one-third of the SSA in the wake of the COVID-19 pandemic forced the regional average. This is the product of many years of FGN to seek alternative sources of revenue that are easy overreliance on resource revenues from oil and gas, a to tap into at minimal disruption to the economy. The strategy that is no longer viable due to the volatility of frequency of global crises is only likely to increase, and oil demand and prices, and the inefficiencies in the oil the lessons learned from the COVID-19 crisis should sector. Low revenue collection has perpetuated a vicious be internalized in developing revenue mobilization cycle of under-investment, low human development, strategies. In addition, the reality of Nigeria’s limitations and low incomes. when responding to global fluctuations in oil production necessitates pivoting to more predictable revenue sources. The COVID-19 pandemic added more pressure The revenue streams suggested below and administrative on already subdued domestic revenue and pushed reforms to seal compliance gaps are likely to be sticky Nigeria further into deficit. In addition to the drop in beyond the pandemic and any subsequent crisis. oil and gas revenue, as economic activity slowed down and, in some cases, stalled, the pandemic also had an As the economy slowly recovers, avenues for adverse impact on other revenue streams. Households accelerating disaster risk management should be consumed less, and corporate profits fell, reducing VAT limited to those that do not jeopardize investment, collections and corporate income tax (CIT)—two of the growth, or jobs. While Nigeria’s economy performed largest sources of non-oil revenue. The pandemic also better than expected in 2020, it nonetheless suffered reduced the scope for tax administration enforcement the deepest recession in almost four decades. This was actions, and minimal use of automation in tax subsequently followed by moderate growth in 2021 administration precluded any leveraging of technology as the economy slowly recovered, culminating in a late to improve compliance. rally largely driven by a spike in global oil prices. Due to the precarious nature of the global economic recovery, While the pandemic brought many challenges, it also revenue-raising policies and administrative actions must provided a rare opportunity to make changes that be carefully chosen so as not to undermine an already could give revenues a major boost in the long run. weak growth recovery path for Nigeria. Further pressure on oil prices and diminished demand FIGURE 4.3. Driven by crises, general government FIGURE 4.4. The revenue gap between Nigeria and revenue continues to fall its peers continues to widen Trend in oil and non-oil revenue, percent of GDP Trends in revenue, percent of GDP 14 30 12 25 10 20 8 6 15 4 10 2 0 5 10 11 12 13 14 15 16 17 18 19 20 e 10 11 12 13 14 15 16 17 18 19 20 e 21 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 J Oil J Non-oil ▬ Total revenues ▬ NGA ▬ IND ▬ IDN ▬ EGY ▬ MEX ▬ MYS ▬ ZAF Source: OAGF. Source: World Bank MFMod. 62 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment TECHNICAL NOTES  |  CHARTING A NEW COURSE 4.2  The economy has adequate space but the level of ambition is still low, and the change is for administrative and policy reforms that estimated to only raise N33 billion in 2023. do not negatively impact investment and growth Enhancing the excise regime offers an immediate opportunity for revenue increases; an appropriate The World Bank estimates that Nigeria’s non-oil excise rate on beer alone could raise up to revenue potential is more than twice what it currently N600 billion. The FGN has indicated a commitment collects. With the right reforms, Nigeria should be able to increasing specific excise tax on cigarettes from to achieve a tax-to-GDP ratio comparable to regional N2.9 to N4.2 per stick on top of the ad valorem rate peers such as Ghana and Uganda at 12 percent, and of 20 percent. While this is commendable, it is still Kenya at 15 percent. The FGN has already taken major marginal in impact both for health and revenue steps to reform the VAT regime and has prepared a mobilization. The effective tax rates for both alcohol medium-term expenditure framework and fiscal strategy and tobacco are less than half the median of Nigeria’s paper (FSP) for 2022–24. There is now an opportunity African peers. To effectively tap into this revenue source, to build on this momentum, especially given the Nigeria could retain the current ad valorem excise rates urgent need to marshal resources to support economic but significantly raise the specific components to better recovery. Given the complex political economy and target individual products. World Bank estimates show the administrative and legal constraints that apply in that retaining the current rates and gradually increasing Nigeria, a sequenced reform approach is likely to achieve the specific duty component to achieve tax incidence the best outcome. consistent with regional peers will generate additional revenue of N955 billion in the first year. Specific excise rates are also preferable because they are simpler to 4.3  Excise tax can help lower the cost of administer and less vulnerable to avoidance through environmental pollution, improve health undervaluation. prospects, and boost tax revenue by up to 1 percent of GDP 4.4  The electronic money transfer (EMT) Although the effective rates have increased marginally levy is a stable revenue source with over the past five years, at 0.06 percent of GDP potential to raise up to N220 billion in Nigeria’s excise taxes are among the world’s lowest. 2022 While the primary purpose of an excise tax is to internalize the social costs of harmful goods such as The EMT levy, introduced in the Finance Act 2020, alcohol and tobacco, their revenue contribution can which amended the Stamp Duty Act, taps into growth also be important. Nigeria does not subject liquid fuel in electronic funds transfer in Nigeria and can be to tax, which is unfortunate since excise taxes could administered at low cost. The EMT levy regulation capture the cost burden of fuel on the environment, and has been cleared and signed by the Minister of Finance this revenue source is inherently stable because demand affirming a singular and one-off charge of N50.00 on for fuel is inelastic. Similarly, Nigeria fares poorly in the any electronic receipt or electronic transfer of N10,000 administration of health taxes, having among the lowest or more. Since the levy is new and wide in scope and excise taxes on alcohol and tobacco globally. The recent may face interpretation problems, the Federal Inland addition of a N10 per liter excise duty on non-alcoholic, Revenue Service (FIRS), which is the designated carbonated and sweetened beverages in the Finance Act administrator, should endeavor to facilitate compliance of 2021 points to some appetite for marginal change, by banks. Enforcement of some elements of the charge, Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 63 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 4.5. Sequenced reforms will best mobilize revenue Immediate Medium Term Long Term Enhance excise rates  on "sin goods" Rationlize tax expenditure:Nigeria Improve revenue from cross border and establishing ecise on petrol and offers a wide range of tax concessions transactions and other international diesel at a token rate. that cover a range of taxes, with tax measures. These range from Implement the Electronic Money the largest impact being in CIT and improvement of personal income tax Transfer levy. This revenue source VAT. Nigeria does have a legislative from undisclosed overseas deposits is sustainable and is likely to grow in framework in place for measurement and illicit financial flows through better coming years. and grant of tax expenditures (the use of information gained under Fiscal Responsibility Act, 2007), exchange of information, to VAT on Improve overall tax compliance which can be leveraged to rationalize online transactions, and CIT from with focus on VAT. Complemented by ineffective tax incentives. accurate application of transfer pricing measures to enhance the efficiency rules. of FIRS through ICT capacity, HR Reforms key tax statutes at the management and training of staff, Federal level, i .e. the Corporate Enhance Internally Generated organizational reforms and process Income Tax Act (CITA) and the Value Revenues (IGR). Efforts are needed improvements. Added Tax Act (VATA), including to improve States' collection of PIT plugging loopholes, rationalization of and other taxes such as the property the treatment of expenditures (CITA) tax. and credits (VATA), and development of anti-fragmentation rules. FIGURE 4.6. Nigeria’s excise tax revenue is among FIGURE 4.7. Marginal improvement has the lowest in SSA consequential revenue implications Excise tax, percent of price Excise tax, percent of GDP 8 1.2 { Highest=7.27 7 1.0 6 5 0.8 4 Excise reforms have potential 0.6 to raise revenue by 1 percent 3 of GDP ~1.5 trillion naira (US$4 billion) Median=1.36 0.4 2 1 0.2 Lowest=0.06 0 O C A A F A N R N N B LI IV A AM A O A 0 ZA RW BW TZ G ZM H SY KE M D SE G LS AG M C Côte d'Ivoire Botswana Angola Namibia Nigeria G U M N N C Source: IMF world revenue longitudinal data. Source: IMF world revenue longitudinal data. FIGURE 4.8. There is ample space to raise excise FIGURE 4.9. Nigeria’s excise rates are lower than rates for alcohol and cigarettes those of its peers Excise tax, percent of price Excise tax, percent of price 300 Nigeria 250 Cameroon 200 Kenya 150 Moving to the ECOWAS Senegal recommended 100 level of 50% more than Ghana doubles excise 50 revenues Uganda 0 Wine Beer Spirit Cigarettes 0 50 100 150 200 J Highest J Median J Nigeria J Lowest J Cigarettes J Spirit J Beer J Wine Source: PwC worldwide tax summaries. Source: PwC worldwide tax summaries. 64 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment TECHNICAL NOTES  |  CHARTING A NEW COURSE such as inter-bank transfers, especially where the bank 4.6 VAT reforms introduced in the is both the sending and receiving institution, could be Finance Act 2019 can raise 0.4 percent of challenging in view of possible resistance from the banks GDP in revenue, and another 1.4 percent and could be sub-optimal for overall tax compliance. In could come from better compliance addition, the rollout of this levy could distort behavior by incentivizing cash transactions. Despite the teething While further raising of VAT rates may not be viable challenges, the EMT levy promises to be a significant in the short term due to prevailing concerns on the source of revenue if well implemented. fragility of the global economy burdened by high inflation, a supply-chain crisis, and food shortages, broadening the VAT base and improving compliance 4.5  Reforms of corporate income tax would significantly raise VAT revenue. The Finance (CIT) can seal loopholes without raising Act 2020 introduced VAT taxation of cross-border the tax burden on compliant corporations, business-to-consumer digital supplies to align with the potentially raising revenue by 0.7 percent CIT digital tax introduced in Finance Act 2019. Proper of GDP application of this provision would significantly boost VAT revenues and open up room for future revenue In the current environment, in which raising CIT growth as cross-border consumption of digital products rates could suppress fragile economic recovery, continues to grow. In addition, a general anti-avoidance targeting compliance and rationalization of tax rule should be introduced in the Value Added Tax Act expenditures provides an avenue for CIT-related with adequate regulations among them covering anti- growth:  (i) An anti-fragmentation rule could be fragmentation to prevent splitting of business operations included in the Corporate Income Tax Act to prevent into small companies in order to fall below the VAT medium and large companies from fragmenting business filing threshold introduced in the Finance Act 2019. activity into multiple companies to take advantage of the exemption for small companies with turnover of In the medium term, the current 7.5 percent VAT less than N25 million. (ii) The definition of “dividends” rate—one of the lowest in SSA—can be raised to should be revised to include “disguised” dividends to international levels of 10–15 percent. The limited prevent companies from funneling corporate profits to input tax credit mechanism means that Nigerian shareholders without paying tax. In the medium term, a VAT operates more like a turnover tax applying at all technical diagnostic review of the Corporate Income Tax levels of production and distribution, with more than Act will be necessary to identify loopholes and technical N800 billion in input tax credit denials. This distorts deficiencies in current law and to rationalize costly tax production efficiency and effectively leads to lower incentives. Nevertheless, some progress has been made revenue collection. The mechanism should be reviewed through the Finance Act 2021, which now provides for and reformed, with the long-term goal of a broad-based amendment of the Capital Gains Tax Act, removing VAT regime with a single rate and a comprehensive exemptions on capital gains on the sale of stocks greater input tax credit mechanism. This would be the most than N100 million in a 12-month period. In addition, efficient way to collect VAT revenue. the clause allowing for exemption of income from interest on corporate bonds has been allowed to sunset in January 2022. Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 65 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 4.7  In the medium term, tax concessions the only previous publication happening in 2020. should be rationalized to reduce market The TES can supplement the FGN’s Annual Budget distortions by providing data for analyzing the cost, benefit, and effectiveness of individual tax expenditures in achieving How governments deploy tax expenditures is critical, policy goals. Ultimately, the TES will allow for greater especially in the current economic context. Selective transparency, and will also inform discussion of the and targeted use of concessions can provide a lifeline equity and efficiency of the tax system. The 2021 TES for struggling entities, especially those hit hardest by has already highlighted the excessively large policy and the COVID-19 pandemic and the associated economic compliance gaps. According to the TES estimates, total downturn. Rationalization could also greatly ease revenues forgone in 2020 were N5.8 trillion. VAT perennial revenue losses by closing loopholes in order to revenue forgone were valued at N4.3 trillion, CIT at foster healthy market competition between corporations. N457 billion, petroleum profit taxes at N307 billion and The Nigerian tax system includes many concessionary customs at N780 billion. measures intended to achieve various policy goals, but that can only come at the cost of lower tax revenues. These tax expenditures influence choices and create 4.8  Improving tax administration by incentives for persons and businesses to alter economic sealing compliance gaps can bridge the behavior. For more efficient use of tax expenditures, revenue gap caused by low economic the policy objectives for underlying individual tax activity in the wake of a global economic expenditures must be clearly defined and the associated downturn costs monitored. To achieve this, the FGN must endeavor to publish accurate tax expenditure statements A central lesson from the COVID-19 pandemic has to allow for scrutiny by the public to ascertain who gets been that it is critical for revenue administration tax concessions. authorities to maintain operations and business continuity during a crisis. Achieving this not only There has been progress: in 2021, the FGN published depends on the availability of reliable ICT platforms a Tax Expenditures Statement (TES) accompanying but also on good processes to enhance decision-making the Medium-Term Expenditure Framework, with in a rapidly changing environment. Nigeria’s revenue FIGURE 4.10. Bridging compliance gaps would FIGURE 4.11. Reviewing tax expenditures alone greatly enhance VAT receipts can double current revenues Drivers of VAT concessions, N million Cost of tax concessions in 2020, N trillion 4,000 5.0 4.5 3,000 4.0 3.5 2,000 3.0 2.5 1,000 2.0 1.5 0 1.0 0.5 -1,000 0 ITC denials- ITC denials- Policy Compliance Companies Value Added Tax Customs duties service capital gap gap income tax J Estimated revenue forgone J Actual revenue received … Potential total Source: Nigeria Budget office medium-term expenditure framework 2022– Source: Nigeria Budget office medium-term expenditure framework 2022– 2024. 2024. 66 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment TECHNICAL NOTES  |  CHARTING A NEW COURSE agencies—FIRS and the Nigeria Customs Service— future, identify application and IT service development are working to accelerate the move to digital revenue priorities, and provide a framework for the continuous administration. The goal is to provide taxpayer-friendly, improvement of IT service delivery within FIRS and a world-class online services, characterized by efficient, roadmap to achieve its objectives. First among these paperless operations, and enhanced by ICT-enabled measures is to have medium to large taxpayers file all enforcement to optimize revenue. With a spike in their CIT and VAT taxes electronically using the TaxPro global inflation, a looming global food shortage, and a Max platform. The uptake among large taxpayers is at war in Eastern Europe all coming right on the back of 96 percent, while the overall uptake stands at less than a global epidemic, revenue agencies must be prepared 40 percent. Higher uptake among medium taxpayers for frequent disruption in operations, and this can would result in significant compliance gains. be achieved by putting in place robust technical and decision-making processes. While physical infrastructure, such as ICT equipment, is important, equally critical is With critical operations in place, investment in VAT organizational efficiency. Currently, efficiency is compliance is likely to provide the best returns. A obstructed by overlapping management structures, the 2019 World Bank analysis of the VAT gap in 2019 found lack of standard operating procedures, and inconsistent it to be as wide as N3.1 trillion. A subsequent analysis work processes. These challenges can be resolved in by the budget office in 2021 puts the VAT tax gap at large part by redesigning the organization, improving N4.3 trillion. It estimated that N900 billion was due to and digitalizing business processes, standardizing policy gaps, such as exemptions set out in legislation, work procedures, and building capacity and otherwise and N3.4 trillion attributable to a compliance gap. The improving human resources management. Staff should 2020 increase in the VAT rate from 5.0 to 7.5 percent be trained and regularly retrained to improve both has significantly widened the VAT compliance gap, efficiency and retention. Over the long term, appropriate which is likely understated given rising inflation. Gains human resources policies, planning, and processes need from improved compliance can allow the FGN to sustain to be put in place, supported by robust monitoring and critical spending without overburdening taxpayers evaluation. Reforms underway should be periodically during economic downturns. evaluated, using standard tools such as the World Bank Group’s DIAMOND assessment methodology. 4.9  Adopting a digital transformation strategy for an ICT-driven FIRS and 4.10  Reforms to state tax administration enhancing its organizational efficiency will can supplement federal revenue allow FIRS to weather future crises better collection efforts, internally generated revenue (IGR) being the third-largest Done well, digital transformation of FIRS operations source of non-oil revenue after VAT and may be a positive outcome of the pandemic. After a CIT significant drop in revenue collection since the onset A significant part of the fiscal challenge in Nigeria of the COVID-19 pandemic, FIRS is fast-tracking a stems from the distribution of tax administration digital transformation strategy to establish a strong between the federal and state levels. While there are ICT backbone for the tax authority in anticipation of political and constitutional constraints on what taxes can future disruptions. The three-year Strategy (2021–23) be collected, it is still possible to make improvements intends to align IT priorities to FIRS business needs, that can materially affect the amount of revenue highlight areas to be supported for stable operations in Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 67 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 collected. Of note is the revenue potential from personal than 1 percent of national GDP. Based on information income tax (PIT) and property taxes. collected from Nigerian states, total property tax revenue is estimated at 0.01 percent of national GDP, with most The PIT collected by states is low due to tax evasion; collecting less than N400 per capita. certain classes of taxpayers escape the PIT net entirely. A major problem is underreporting by high-net-worth Significant revenue can be generated from land individuals (HNWIs) and unincorporated business. use charges (LUC) to complement state internally There is also a large informal sector, with many small- generated revenue (IGR). This can be done by scale traders and businesses that do not report income. broadening the tax base, creating a database of properties While enforcement should be conducted in all these and LUC payers within a geographic information areas, resources would be best used in pursuit of high- system, improving the information on taxable properties, potential areas such as taxing HNWIs. Income data may revising the assessment basis for the LUC, reviewing be limited but it is possible to estimate HNWI income the current tariff structure, strengthening supporting based on third-party sources of information, such as legislation, and simplifying tax compliance. However, property cadasters, land use charge records, and other several factors make reforming this revenue source third-party sources, such as financial intermediaries and daunting. shareholder registers. Foreign income can be identified from the Automatic Exchange of Information data 9. Incomplete or inaccurate records on potential available through international initiatives. taxpayers and insufficient information on properties do not support effective property FIGURE 4.12. Nigeria collects less in property tax revenue than its SSA peers taxation. In several states tax administration is Property tax collection, percent of GDP carried out using manual approaches, paper-based 5.0 property files, maps, and other legal documents. Lack 4.5 of a computerized database of properties severely 4.0 impedes tax administration and does not allow states 3.5 3.0 to leverage the efficiencies of technology. A few states 2.5 (notably Kaduna, Edo, Nasarawa, and Lagos) have 2.0 set up geographic information system administration 1.5 Raising property revenue to 0.2% of GDP would raise agencies to help them identify property records. 1.0 revenue by NGN 300 billion 0.5 0 10. In transfer deeds, property values are often not accurately stated, in part to reduce stamp duty SA AN BR F IV SE I N O R A N A S G RT A D A L ZA BF BW TZ U M KE O G AG O M C M U C G M C N C C Source: IMF, Government Financial Statistics and World Bank estimate for liability, in part due to lack of laws to enforce Nigeria. honest disclosure. Because property values are under-reported, the properties are under-taxed. In addition to PIT, recurrent immovable property Where states prescribe valuation of properties, the tax is a stable source of revenue for subnational and assessment methods for the LUC are not able to local governments all over the world. In advanced capture market values because market data are not countries such as the United States, Canada, and the reliable. Several states have therefore resorted to United Kingdom, as much as 3 percent of national setting low, flat rates per property, even when the GDP annually is collected through this tax instrument. revenue collected is relatively small. This tax generates significant revenues in some SSA countries, notably South Africa, where it generates more 68 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment TECHNICAL NOTES  |  CHARTING A NEW COURSE 11. Some states lack the legislation necessary to support the LUC levy. In others, the legislation is not fully compliant with the Constitution. Where there is legislation, it is poorly enforced, lowering collection rates. 12. Cumbersome compliance requirements necessitate several visits to banks and government offices. Because LUC revenue is low, it should be possible to make payments via mobile money and other non- traditional mechanisms, especially when taxpayers do not have bank accounts. Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 69 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options Which Reforms Are Critical Structural initiatives Why Reforms Are Reforms that can be Reforms that can be and institutional What Impact These Needed carried out in 1–6 carried out within 18 reforms that can put Reforms Could Have months months on a firm footing in the next 3 years Non-oil revenues • Reform excise tax • Fully implement • Build the capacity • Tax policy and have been rates. VAT and CIT of federal tax administration stagnant due to compliance and customs reforms can help a sub-optimal • Launch VAT compliance programs. administration increase Nigeria’s VAT system, to improve tax-to-GDP ratio in extensive use of improvement • Make desk audits initiatives such as more effective. compliance. the medium term tax incentives, by 3 percent, thus lack of effective VAT lottery and • Review the • Establish a VAT education modern, digital helping to reduce enforcement, and CIT Law; bring the fiscal deficit, the high costs of visits programs. international tax ICT-based tax administration and increase tax compliance. • Craft the Digital rules into line fiscal space for Transformation with global best that uses Big Data effectively investments in Strategy for ICT practice, with an human capital and in FIRS, laying emphasis on the and is powered by risk engines the infrastructure the foundation practical. needed to connect for a tech-driven, to ensure smart • Rationalize enforcement. farmers and firms efficient tax ineffective tax to markets and administration. incentives. youth to jobs. • Build capacity • Improve how • Advance health in the audit and Customs and environment taxation of large administers VAT, policy goals by business. duty, and excises. capturing more of the negative externalities of consumption of harm goods. • Increase non-oil revenues from excise, EMT levy, VAT, incentives, and international tax reforms. Adopt a public Enhance FIRS engagement efficiency by strategy that links supporting reforms revenue mobilization to the structure of to increased the organization, investment in ensuring that infrastructure and management human capital. approaches and standard operating procedures are consistent and, supported by effective human resources management. 70 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (continued) Which Reforms Are Critical Structural initiatives Why Reforms Are Reforms that can be Reforms that can be and institutional What Impact These Needed carried out in 1–6 carried out within 18 reforms that can put Reforms Could Have months months on a firm footing in the next 3 years • Improve state level • Introduce a • Establish • State IGR reforms PIT and improve well-designed, consolidated state would: provide state-Federal progressive revenue accounts taxpayer clarity cooperation in tax and properly as part of state and reduce administration. administered TSAs. double-taxation; property tax reduce leakages • expand electronic from IGR sitting tax payments in individual and stop cash ministries, payments; departments, and agencies (MDA) accounts; induce more efficient land use and provide revenue to states and local governments. Tax design • Streamline the • Record and • More post-tax is impeding VAT, eliminating harmonize IGR profits available for business growth unnecessary policies and investment. by:(i) increasing frictions that administration working capital • Lower compliance impinge on across states and costs for SMEs requirements; and productivity, and minimize double (ii) the high cost of that give them avoiding tax taxation in terms of an incentive compliance, with cascading. federal policies. no simplification to become measures yet • Ensure prompt formalized. available for small VAT refunds, after • Paperless business, which putting in place operations, makes the tax strong controls. equipped with policy regressive. • Establish a sharp, ICT- valuation database enabled risk-based of high-value enforcement. urban properties • High working for the LUC. capital requirements obviated. Inefficient Customs • Improve Nigeria • Modernize the • Improved tax Administration Customs Service FIRS and Nigeria morale because of reduces trade and administration of Customs Service more clarity about tax collection border entries and to create a taxes by reducing reduce processing taxpayer-friendly double taxation times. organization incidents, negative • Simplify tax providing world- experiences with assessment class online tax officials, and and payment services. lack of how taxes mechanisms are used. as part of ICT development in FIRS. Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment 71 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (continued) Which Reforms Are Critical Structural initiatives Why Reforms Are Reforms that can be Reforms that can be and institutional What Impact These Needed carried out in 1–6 carried out within 18 reforms that can put Reforms Could Have months months on a firm footing in the next 3 years Shadow economy • Focus on • Pilot internal • Successfully • The demonstration is estimated at over HNWIs for PIT cooperation embed a effect of HNWIs 50%. enforcement. with one state Compliance Risk being subject • Introduce well- IRS (Lagos) to Management to taxation will designed simplified strengthen PIT, system based improve voluntary PIT regimes for CIT and VAT on objective risk compliance and SMEs; SMEs enforcement. criteria. widen the tax operating as base. companies are exempted from CIT. 72 Note 4: Options for Nigeria to Mobilize Domestic Revenues Without Hurting Investment Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities Authors: Ryan Chia Kuo, Sara Nyman, and Rodrigo Barajas NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities Summary: The degree of competition is perceived as quality of mobile services. Pro-competition licensing and weak in Nigeria when compared with its peers. While equal access to Right of Way could also help foster entry the country has made significant progress in passing a and investment in the fixed broadband market. Finally, competition law, its policy approach to competition still an independent regulator that works together with the needs strengthening. Several key markets exhibit a high competition authority could help mitigate competition degree of concentration and poor market outcomes, risks in the ICT sector. Nigeria’s digital financial such as high prices or low access, reflecting barriers to services market could also benefit from pro-competition entry and to the expansion of smaller firms. Boosting regulations: the FGN could explore easing challenges product market competition in Nigeria is critical for for third parties in accessing MNOs’ communication enabling a more efficient allocation of resources and channels to make bank transactions for digital financial productivity growth, and making staple products more services. If designed and conducted under non- affordable to increase consumer welfare. To achieve discriminatory conditions, Nigeria’s framework for Open competitive markets, Nigeria must put in place a sound Banking could also pave the way for new fintech to and holistic approach to competition that encompasses create innovative financial products. enforcement of the competition law and the design of pro-competition government interventions. On enforcement, Nigeria has taken important steps 5.1  Background and Context forward in establishing competition policy frameworks. Nevertheless, there remains room to further strengthen 5.1.1  Reforms that intensify competitive the legal framework, including closing select exemptions pressures or promote effective to the law. In addition, institutional improvements competition in key sectors of Nigeria’s related to independence and, especially, capacity economy can be crucial to achieving building of the competition authority are needed. With productivity gains and, ultimately, respect to government interventions, reviewing Nigeria’s economic growth. general stance toward industrial policy is critical: There is significant evidence of the economic benefits various policies have introduced market distortions via of greater product market competition (or even local content rules, import restrictions, restrictions on the threat of competition) on both the supply side foreign companies, implementation of privatization of the market (producers) and on the demand side processes in a manner that creates market power, and (consumers). Theoretical and empirical work suggests biased standard-setting processes, among other issues. that opening domestic markets to greater competition There is also scope for sector-specific policies and can enhance allocative, productive, and dynamic regulation to better embed competition principles. For efficiencies of firms and hence aggregate productivity. example, in the ICT sector, Nigeria would benefit from First, in a well-functioning economy, competition a pro-competition framework for broadband rollout. leads to a reallocation of resources from low to high An infrastructure-sharing regulation would improve productivity firms (Arnold et al., 2011), where less networks and coverage, while policies to improve productive firms either shrink or exit the market. efficiency in spectrum use and MVNO participation can Second, competition induces existing firms to become foster market entry and incentivize investments in the more efficient to survive. (Aghion and Howitt, 2006; 74 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE Blundell et al., 1999; Conway et al., 2006; Nickell, These mechanisms mean that competition policy 1996). Greater competition incentivizes firms to make contributes to economic diversification by facilitating more efficient use of resources and to dynamically efficient resource allocation across products, firms, improve efficiency by adapting production processes or and economic activities. Policies promoting and upgrading quality to achieve higher markups.73 Effective safeguarding competition induce firms to make more competition also induces positive changes in business efficient use of resources by producing cost-effectively practices, for example, reduced managerial and non- and dynamically by adapting processes or upgrading managerial slack (Bloom et al., 2012; Bloom, Sadun quality. They also enhance the reallocation of resources and Van Reenen; 2012; Bloom et al., 2015). Larger to firms that are most able to achieve these gains in productivity growth derived from more competitive the long run. This has positive spillover effects on markets has been seen in several developing countries. the rest of the economy, and through backward and For example, recent evidence from South Africa’s forward linkages may help relax some technological manufacturing sector finds that firms that face greater constraints and facilitate both domestic and export competition have higher productivity growth (Dauda et diversification. In practice, many markets in developing al., 2019). Similar evidence, drawing on sectoral data for countries—especially those that are important inputs the manufacturing sector, has been found for Argentina for new products, such as fertilizer, cement, and (Licetti et al., 2018), Brazil (Reis et al., 2018), Jordan telecommunications markets—are characterized by entry and Morocco (Sekkat, 2009, Moldova (World Bank, barriers and anticompetitive behavior, thereby hindering 2019c), and Tunisia (World Bank, 2014). In addition to economic diversification. There are real world examples increasing incentives for process innovation, promoting of competition policy reforms that have had tangible competition encourages product innovation aimed at impacts on diversification. In Kenya, competition policy “escaping competition” (Aghion and Griffith, 2005; reform was central to the emergence of mobile banking Acemoglu et al., 2007; Bassanini and Ernst, 2002; services. The entrance of Mobile Virtual Network Bloom et al., 2011). In an environment where policies Operators (MVNOs) into the banking industry led to are not designed to encourage competition, firms often the introduction of new banking products and helped seek to leverage political dynamics and connections to entry of new small businesses. In Honduras, competition gain market share through regulatory advantage, instead policy reform promoted entry of new firms in of seeking profits through innovation and efficiency. agricultural input markets (fertilizers and pesticides). The Third, competition in input (upstream) markets, such reform eliminated discretionary procedures and reduced as transportation, energy, and telecommunications, the registration time from three years to 90 days. Since is a key driver of competitiveness and growth in the reform, 300 new products were registered, and the downstream sectors—the users of these inputs (Barone price of some pesticides fell by 9 percent (WBG, 2017). and Cingano, 2011).74 Sustainable growth through the expansion of markets and productivity cascades Competition can also help boost employment in into increased prosperity and opportunities, allowing Nigeria, either directly or through the effect of consumers to access a wide variety of well-priced quality productivity gains of firms. Evidence suggests that products, increasing welfare and providing sustainable competition policies can boost jobs. Competition opportunities for job creation (World Bank, 2017). stimulates firms’ willingness to invest and their demand 73 As an example of this channel, Carlin et al. (2004) show, using a dataset of about 4,000 firms in 24 transition countries, that firms facing between one and three competitors saw real sales grow by almost 11 percent on average over three years, while monopolists suffered from a 1 percent decline in real sales. Similarly, Nickell (1996) found that a 10 percent increase in price markups resulted on average in a 1.3–1.6 percent loss in TFP growth. 74 Barone and Cingano (2011) show that in OECD countries, pro-competition reforms in input services sectors (telecommunication, transport, energy and professional services) increase value added, productivity and export growth of downstream service-intensive sectors. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 75 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 for labor (Blanchard, and Giavazzi, 2003; Griffith and 5.1.2  Competition and competition Harrison, 2004). In addition, competition stimulates policy are perceived as weak in Nigeria firms’ willingness to pay higher wages to their workers compared with peers (Brambilla et al., 2016) and reduces the gender wage gap (Ashenfelter and Hannan, 1986; Belfield and Heywood, Nigeria’s fundamental conditions to support a 2006) and the level of informality in an economy Anand market-based economy where markets reward and Khera, 2016; Charlot et al., 2015). Competition competitive businesses are perceived to be below the policies and laws also boost investment (Alesina et al., average of peer countries.75 The strength of market- 2005) and ensure that firms can interact on a level based competition and competition policy in particular playing field. In South Africa, research found that lower are perceived to be low in Nigeria, according to the product market competition has a significant negative Bertelsmann Stiftung’s Transformation Index (BTI)76 effect on employment growth, and wage growth in (FIGURE 5.2), being the second-worst performer in manufacturing industries (Dauda et al., 2019). FIGURE terms of competition policy. In addition, businesses 5.1 outlines these mechanisms. perceive competition-related business risks in Nigeria to be relatively high compared with its peers, with vested interests and cronyism being the most prominent risk components according to the Economic Intelligence Unit 2021 survey (FIGURE 5.3). FIGURE 5.1. Impact of competition policy in productivity, jobs, and diversification Competition boosts productivity Competition Domestic policy “Within-effect” “Between-effect” “Selection-effect” diversification Competition creates pressure Promotes the allocation of Competition promotes entry for firms to improve their resources towards more and reduces the probability Ÿ Domestic quality processes and/or products efficient uses, reflected in of less efficient firms to stay upgrading Competition in (e.g. quality) higher market shares among in the market Market regulation output industries the most efficient firms Ÿ Within industry Increase productivity through: Increase productivity and sectoral policies Technology adoption, Increase productivity through: through: Promoting entry allocative efficiency innovation, diversification, Flowing capital, land and and permanence of high- accumulation of human and labor towards more efficient efficient firms based on the Ÿ Across industry Competition in physical capital (e.g. uses merit, while promoting exist allocative efficiency intermediate managerial skills) of less efficient ones input sectors Policies on state aid/SOEs/ competitive neutrality Export Price effect New market expansion Price elasticity effect effect diversification Firms pass on some Firms can invest productivity efficiency gains to Firms can invest some of gains in higher quality consumers in the form of their productivity gains in products of products with Competition law lower prices: more demand strong demand “appeal” (low new market expansion enforcement: for the same products, activities, leading to higher price elasticity of demand), Interaction antitrust, leading to more demand for demand in new markets, leading to more demand for between merger control labor leading to more demand for new products and more competition and labor demand for labor trade policy Jobs expansion and upgrading Source: Elaboration based on: WBG (2017), Syverson (2011), Cusolito and Maloney (2018), and Dauda (2020). 75 Based on peer countries used in the Nigeria SCD. 76 The indicators of the Bertelsmann Stiftung’s Transformation Index (BTI) answer the following questions based on expert judgment: (i) to what level have the fundamentals of market-based competition developed (including the low importance of administered pricing, currency convertibility, no significant entry and exit barriers in product and factor markets, freedom to launch and withdraw investments, and no discrimination based on ownership (state/private, foreign/local) and size, (ii) to what extent do safeguards exist to prevent the development of economic monopolies and cartels, and to what extent are they enforced (including the existence of antitrust or competition laws and enforcement)?; and (iii) to what extent has foreign trade been liberalized (including conditions, tariff and non-tariff measures for market access, import licensing and customs valuation, export subsidies and “countervailing duties” on allegedly subsidized imports, import quotas and export limitations, contingency trade barriers [anti- dumping procedures, “safeguards”—restrictions of imports to protect a specific domestic industry from serious injury], replacement of non-tariff with tariff measures, and information on the country’s participation in the WTO)? 76 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 5.2. Nigeria scores below peers in terms FIGURE 5.3. Business risks related to weak of the degree of market-based competition and competition policies are perceived to be relatively competition policy higher in Nigeria compared with peers BTI 2020 score, scale 0–10, lower score worse EIU 2021 score, scale 0–16, higher score worse 10 16 9 14 8 12 7 6 10 5 8 4 6 3 4 2 1 2 0 0 er p. m Br a G zil al a a C m.R e N oon Za ria An bia la do in K ia nz a M Eg a rit t M nia n o et l il al ia M sia Ke c o Za ya et a Be m E in In zan t do ia G sia Zi ne a C bab l er e , D An on . R la M ige . rit a ia Vi ega m ga au yp n p N ep az am e di M han si e w Ta eny i Se ic Vi bi Se an am w au ri go In Ben s an M Ind n em go an na na Ta gy a i n o e ex ay , D ab ne ay ex ne In m a m Br h ig go mb on Zi go on C C J Competition policy 2020 Q Competition policy 2010 J Price controls J Unfair competitive practices J Discrimination against foreign companies J Vested interests/cronyism Source: Bertelsmann Stiftung's Transformation Index BTI, 2020 (the Source: Economist Intelligence Unit. responses reflect the situation in the country at the end of January 2019). Note: Highest risk per area=4. Maximum total level of risk=16. Note: The BTI is a perception indicator based on in-depth assessments of countries and is managed by the Bertelsmann Stiftung. 5.1.3  There is scope for improvement Economic Forum. Nigeria is ranked below several of its in the extent of market concentration in regional peers such as Ghana, Benin, and Egypt, and Nigeria, which could reflect barriers to also below Indonesia, India, Vietnam, and Malaysia, and entry and expansion no progress was made in the period from 2010 to 2019 (FIGURE 5.5). Nigerian manufacturing markets appear to consist of a relatively high number of players compared Meanwhile, several key markets show a relatively high with its peers; however, several key markets show a degree of concentration, including flour-milling, high degree of concentration reflecting in part the sugar-milling, ammonia fertilizer production, existence of barriers to entry and the expansion of brewing, cement production, and mobile telecoms smaller firms. WBES data indicate a relatively high services. proportion of enterprises reporting operating in a market with six or more players (potentially reflecting As FIGURE 5.6 shows, of nine markets with available the relatively large size of the Nigerian economy market share data, all had Herfindahl-Hirschman compared with some peer countries), but there is also Index (HHI) scores higher than 2,500, the threshold a disproportionate percentage of monopolies among for a market to be considered a highly concentrated countries with unconcentrated markets (FIGURE 5.4). sector.77 Sugar-milling, brewing, cement and fertilizer While in most comparable countries the percentage of markets exhibit high levels of concentration with HHI firms that perceive themselves as monopolies has gone between 4,600 and 6,000. Market structure provides down, in Nigeria the numbers have not changed. At only one aspect of market dynamics, however, and it is the same time, Nigeria falls in the mid-range of peers important to also look at whether Nigeria’s policy and in terms of the extent of market dominance as reported regulatory framework is supportive of competition, by the Global Competitiveness Report of the World entry, and expansion of firms in the longer term. 77 Based on the HHI, the concentration levels are classified as follows: (i) Unconcentrated Markets: HHI below 1,500; (ii) Moderately Concentrated Markets: HHI between 1,500 and 2,500; and (iii) Highly Concentrated Markets: HHI above 2,500 (Horizontal Merger Guidelines 2010; U.S. Department of Justice and Federal Trade Commission). Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 77 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 5.4. Manufacturing sector markets FIGURE 5.5. Percentage of respondents that appear to be relatively unconcentrated in Nigeria perceive themselves to be monopolies but there is a disproportionate percentage of monopolies Percentage of respondents by number of perceived Percentage of respondents that perceive themselves to be competitors in market monopolies 100 12 90 80 10 70 8 60 50 6 40 30 4 20 2 10 0 0 nz ia do ia et a G am N na n a al al a Ke e , D Za ya Eg C . ia Ar ero . ab on . Br la Be zil M nin Zi rita o ba a . Vi ia Za m K a do a au ia go imb ia em we er . n Ta dia G ia Se na al l a p ep M ga ep am p si Vi esi Se eri au ic m ni bw bi In eny oo si Ta Ind In an M eg em mb go yp am Re M nes on Z itan an a er na C Re n ha ay ha M ex n R , D ab ay m In ne R ig n An ig nz et ab r . N Ar t, t, go yp on Eg C C J Monopoly J Duopoly J Oligopoly (2–5) J More than 5 J Monopoly (most recent data) Q Previous data Q Previous concentration level (<6) Source: World Bank Enterprise Survey and the authors' elaboration based on World Bank Enterprise Survey data for various years, latest data available. Note: The shares reflect the percentage of responding establishments that answered “None”, “One”, “2–5” or “More than 5” to the question “For fiscal year [indicated in parenthesis], for the main market in which this establishment sold its main product, how many competitors did this establishment’s main product/ product line face?”, respectively. For example, “None” was coded as “Monopoly” and “One” as "Duopoly". Exclusions: Establishments with no answers to the question and establishments whose main market for its main product line is international. FIGURE 5.6. Nigeria is outperformed by several FIGURE 5.7. Concentration levels in selected peers in terms of the extent of market dominance manufacturing and services sectors of Nigeria's in markets economy fall above the 2,500 threshold, considered to be “highly concentrated” Extent of market dominance (1-7, best) Market concentration index 5.0 7,000 4.5 5,942 6,000 5,449 4.0 5,168 5,000 4,686 3.5 4,000 3.0 3,116 3,007 2,881 2,861 2,784 2.5 3,000 2.0 2,000 1.5 1,000 1.0 0 0.5 Su cti sed ng n es es es es ng g io ga on in ic ic ic 0 ic illi illi ct u a ew rv rv rv rv rm rm du od -b Se Se Se Se , D Za we . R ia M ng . rit la ia Eg ia In t a do nin et a G am C ige a e ia ne n Br al Ke il M ya Zi nza o ba ia Br A ep yp pr ia az ro Ta exic di Vi esi N n Se roo ou m n em mb au o an g s am r n er on ha b ay In Be tp 3G d 4G 2G n Fl n ai liz m al en ep ile ile ile rti m M em Pr fe A ob ob ob C M ile M M go ob on M C Source: World Economic Forum's Global Competitiveness Report and World Source: World Economic Forum's Global Competitiveness Report and World Economic Forum, 2010 and 2019. Economic Forum, 2010 and 2019. Note: These HHIs do not include import amounts which can apply competitive pressure to domestic industries. Source: Sugar and Flour data as of 2016 https://journalissues.org/wp- content/uploads/2016/06/Ofonyelu.pdf; fertilizer data as of 2015, IFDC database; cement data as of 2015/16, Cement database; mobile services data as of Q2 2021, GSMA intelligence); brewing data as of 2018 http://www. unitedcapitalplcgroup.com/wp-content/uploads/2018/08/INTBREW-Coverage- Initiation-Report1.pdf. 78 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE 5.1.4  The potential impact of boosting generally higher in Lagos than in other major cities in competition the rest of the world, even when controlling for GDP per capita, import costs, the status of logistics, and Removing restrictions to competition and local tax rates (notable exceptions are red meat, pork, strengthening the competition law and policy fish, and white bread; see TABLE 5.1). This potentially frameworks could improve the business climate, reflects weak competition in these product markets. create new markets, and boost both growth and Prices of this basket of goods are, on average, about 14 welfare. Tackling restrictive product market regulations to 18 percent higher than in other economies around the in Nigeria’s professional services segments could result in world (TABLE 5.2 in Annex 5.1). Prices of basic goods an increase of GDP growth by at least 0.2 of a percentage such as flour and rice are disproportionately higher in point (World Bank, 2016). The impact would be even Lagos than in cities in peer countries (FIGURE 5.7) larger if fundamental reforms were implemented in other services segments with higher spillovers across the economy, such as electricity, telecommunications, and 5.1.5  Nigeria must develop a sound transport. Improvements in upstream markets would and holistic approach to competition allow firms to reduce operational costs and expand encompassing three key pillars investment opportunities. The objective of competition policy is not to increase The elimination of market restrictions would make the number of firms in a market or to eliminate private investment more socially impactful. Boosting market power to achieve a theoretical state of perfect competition in basic goods markets could make staple competition. Competition must look to create the products more affordable, boosting consumer welfare, right incentives for firms to improve their economic particularly for households at the bottom of the income performance relative to their actual and potential rivals distribution that consume disproportionately more and, in so doing, allow markets to work more efficiently of such goods. Available retail price data for 41 food for the benefit of consumers and drive sustainable items provide preliminary evidence that retail prices are economic growth. FIGURE 5.8. Constraints to competition may be contributing to higher prices in Nigeria relative to other countries Panel A. Prices of white flour in major cities (2020; US$ for Panel B. Prices of white rice in major cities (2020; US$ for 1kg) 1kg) 10 10 9.8 9 9 8 8 8.1 7 7 6 6 5 5 4 4 3 3 2 2.5 2 1.7 1.7 1.6 1.5 0.9 0.8 0.7 0.7 1 1.4 1.2 0.6 1 0 0 Vi ia am m M on a Se a ia am ya n Za o a M l m co a m Zi ndia e do il e t Za a a t l a il a ga ga yp yp z az si ny oo ic bi si bw bw si bi si di er a er na a n i o ay ex ex ay ne ne m ne Eg m Eg ne In n Br Br Ke Ke er er ig ig ba ba I et et al M al do Se N N Vi m M In In Zi C C Source: Economist Intelligence Unit (EIU). Notes: Cities: Lagos, Nigeria; Hanoi and Ho Chi Minh City, Vietnam; Douala, Cameroon; Kuala Lumpur, Malaysia; Nairobi, Kenya; Dakar, Senegal; Mexico City, Mexico; Harare, Zimbabwe; Rio de Janeiro and Sao Paolo, Brazil; Jakarta, Indonesia; Lusaka, Zambia; Cairo, Egypt; New Delhi and Mumbai, India. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 79 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 TABLE 5.1. Prices in Nigeria (Lagos) are higher than in other in other countries worldwide for a basket of basic goods More Less More Less Product Product expensive expensive expensive expensive Apples Yes *** Mineral Water Yes * Bacon Yes *** Mushrooms Yes *** Bananas Yes *** Olive oil Not significant Beef Yes *** Onions Yes *** Butter Yes *** Oranges Yes *** Carrots Yes *** Peaches (canned) Yes *** Cheese (Imported) Yes *** Peanut or corn oil Yes *** Chicken Yes *** Peas (canned) Yes *** Coca-Cola Yes *** Pork Yes *** Cocoa Yes * Potatoes Yes *** Coffee Yes *** Sliced pineapples (canned) Yes *** Cornflakes Not significant Spaghetti Yes *** Drinking chocolate Yes *** Tea bags Yes *** Eggs Yes *** Tomatoes Yes *** Fish Yes *** Tonic water Not significant Ham Yes *** White bread Yes** Lamb Yes *** White flour Yes *** Lemon Yes ** White rice Yes *** Lettuce Yes *** White sugar Yes *** Not Margarine Yes *** Yoghurt significant Milk (Pasteurized) Yes *** Notes: Results are from an OLS regression using 2010–20 data from the Economist Intelligence Unit (EIU). The dependent variable is the logarithm of market prices (current international $/kg) of the following products: apples (1 kg), bananas (1 kg), beef (fillet, ground, roast, 1 kg), butter (500g), carrots (1 kg), chicken (fresh, frozen 1 kg), cornflakes (375g), eggs (12), flour white (1 kg), fresh fish (1 kg), lettuce (1 head), milk (pasteurized, 1 liter), mineral water (1 liter), mushrooms (1 kg), onions (1 kg), oranges (1 kg), peanut oil (1 liter), potatoes (2 kg), spaghetti (1 kg), sugar white (1 kg), tomatoes (1 kg), tonic water (200 ml), white bread (1 kg), white rice (1 kg) and yoghurt (150g). Standard errors clustered at the country level are in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. Results shown use exchange rates provided by the Economist Intelligence Unit. The results are robust to using exchange rates from the World Bank World Development Indicators (WDIs). The variables GDP, tariff, and logistics performance are from the World Bank’s WDIs, cost of import is from the Trading Across Border dataset, aggregated LPI is from https://lpi.worldbank.org/, and corporate and standard indirect tax rates are from KPMG, Deloitte, and other web sources. The sample includes 97 cities from the following 89 countries: Algeria, Argentina, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belgium, Brazil, Brunei Darussalam, Bulgaria, Cameroon, Canada, Chile, China, Colombia, Costa Rica, the Czech Republic, Côte d'Ivoire, Denmark, Ecuador, Egypt, Arab Rep., Finland, France, Germany, Greece, Guatemala, Hong Kong SAR, China, Hungary, Iceland, India, Indonesia, Iran, Islamic Rep., Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, Rep of Korea, Kuwait, Libya, Luxembourg, Malaysia, Mexico, Morocco, Nepal, the Netherlands, New Caledonia, New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, the Philippines, Poland, Portugal, Qatar, Romania, the Russian Federation, Saudi Arabia, Senegal, Serbia, Singapore, the Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, the Syrian Arab Republic, Taiwan, China, Thailand, Tunisia, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uruguay, Uzbekistan, Vietnam, Zambia, and Zimbabwe. For robustness, a parallel analysis was performed using Numbeo price data for a similar list of products in Nigeria, obtaining similar results. To achieve competitive markets, Nigeria must put in in markets that restrict entry, increase the costs of place a sound and holistic approach to competition competing, or create an unlevel playing field. This that encompasses both enforcement of the implies that, while competition policy must include competition law and the design of pro-competition sound competition law enforcement, it must also go government interventions. This entails a set of beyond this. In practical terms, a holistic competition policies and laws that ensures that competition in the policy framework encompasses three pillars: Pillar 1 marketplace is not restricted in such a way as to reduce entails opening markets to entry and rivalry through pro- economic welfare (Motta, 2004). Anticompetitive competition sector regulation; Pillar 2 involves policies outcomes can result from either: (i) anticompetitive firm to ensure competitive neutrality and promoting a level behavior (cartels, abuse of dominance or anticompetitive playing field across the economy; and Pillar 3 relates to mergers); or (ii) from government interventions the enforcement of antitrust laws that are typically rules 80 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE against the abuse of dominance and anticompetitive Nigeria’s industrial and trade policies are frequently agreements, and merger control. Therefore, the first deployed by policy makers to shape market outcomes two pillars address government interventions that may and protect certain industries, which is likely to lead restrict entry, increase the costs of competing, or create to unintended market distortions in the medium an unlevel playing field, while Pillar 3 focuses on the term. It is thus particularly important that these policies behavior of businesses (FIGURE 5.9). start to incorporate competitive neutrality principles to level the playing field between firms and prevent some Pillars 1 and 2 require pro-competition principles to firms from receiving undue advantages. Studies have be embedded into Nigeria’s policies and regulations, found that sectoral industrial policies (e.g., subsidies, both at the sectoral level and also economy-wide. tax holidays) have a larger impact on productivity Regulations should be designed to achieve public policy growth when targeted at competitive sectors or when objectives while minimizing the extent to which they they are allocated to maintain or increase competition, hinder competition. In some sectors that have natural for example, by inducing entry or encouraging younger monopoly characteristics, regulations that are set with enterprises (Aghion et al., 2015). This way, industrial the explicit objective of increasing entry or the degree policy can be designed to enhance competition in a of rivalry in a market may need to be put in place sector and to serve the dual role of increasing consumer (the ICT and digital financial services sectors are key surplus and growth. Trade policy is another key tool examples that are covered in Section 5.3). Pillars 1 and that policy makers can use to enhance competition and 2 also require bringing a competition perspective when welfare (see Technical Note 3). Section 5.2.2 provides a conducting regulatory impact assessments of procedures, brief discussion on industrial policies in Nigeria. regulations, or policies to understand their impact on competition and to identify alternatives that are more Competition enforcement in Nigeria (Pillar 3), on pro-competition. Integrating competition policy with the other hand, will rely on the recently enacted other policies and introducing competition principles Federal Competition and Consumer Protection can make those broader policies more effective. Act (FCCPA)78 and the recently created Federal Competition and Consumer Protection Commission FIGURE 5.9. A holistic competition policy framework encompasses three pillars Pillar 1: Opening markets through pro- Pillar: Competitive neutrality and Pillar 3: Ensuring effective competition law competition sector regulation. promoting a level playing field. enforcement. Ÿ Policies and regulations to reduce Ÿ Competitive neutrality towards various firms Ÿ Enforcement against cartels and abuse of dominance Ÿ State aid control dominance Ÿ Government interventions to minimize Ÿ Merger control collusive outcomes and the costs of competing Ÿ Institutional framework Tackle government interventions that restrict entry, increase the costs of competing, or Tackle anticompetitive behavior by firms: create an unlevel playing field harming competing on the merits: Ÿ Tackle cartel agreements that raise the Ÿ Remove statutory monopolies, restrictions on the number of firms, or bans on private investment. costs of key inputs and final products and reduce access to a broader variety of Ÿ Eliminate controls on prices and other market variables that increase business risk. products. Ÿ Reform government intervention that discriminate and harm competition on the merit: frameworks Ÿ Prevent anticompetitive mergers. that distort the level playing or grant high levels of discretion. Ÿ Strengthen general antitrust framework, Ÿ Non-discriminatory public procurement rules. combat anticompetitive conduct and abuse of dominance. Ÿ Control sales aid to avoid favoritism, ensure competitive neutrality and minimize distortions on competition. 78 Passed in January 2019. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 81 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 (FCCPC) to enforce the law. The FCCPC should 5.2  Economy-wide government monitor and punish anticompetitive behavior by interventions that affect competition and firms and review mergers to prevent those that could the performance of Nigerian markets potentially harm competition. At the same time, competition enforcement must complement economic 5.2.1  Nigeria has recently passed its market regulation. It must pursue advocacy efforts, competition law and established its analyzing the effect on competition of proposed competition authority but there is some government interventions, and providing opinions on way to go to build the regulations, their unintended impacts on market functioning and tools, and capacity required to tackle proposing potential alternatives to minimize market anticompetitive conduct by firms, prevent anticompetitive mergers, and advocate distortions. The FCCPC, being a new competition for pro-competition policies with other authority, may find it effective to focus on these advocacy government agencies efforts in the early stages of its development while it develops its enforcement capacity (see Section 5.2.1 for a Nigeria has taken important steps forward in discussion on competition law and enforcement capacity establishing competition policy frameworks to tackle in Nigeria). anticompetitive behavior and promote competition in markets. Until recently, laws regulating competition It is important to note that there is a strong had only existed in individual sectors of the economy, for link between Pillars 1 and 2, and Pillar 3. First, example, in telecoms and aviation, while merger review government policies that result in concentrated market was dealt with through the Investments and Securities structures and the dominance of certain firms raise the Act 2007. Nevertheless, after a legislative process that risk of anticompetitive firm practices. Second, some faced opposition from agencies that currently hold a anticompetitive government regulations can directly mandate on competition, as well as from certain major facilitate anticompetitive practices, for example, by private sector players, in January 2019 the FCCPA was making it easier to collude. Thus, Nigeria’s enforcement passed.79 The Act covers key aspects of a competition framework is key to tackling behaviors facilitated by a regulatory framework by prohibiting anticompetitive legacy of distortive policies. But it is equally important practices (cartels, other anticompetitive agreements, for Nigeria’s government policies to be designed to and abuses of dominance), it creates a regime that can minimize the risk of anticompetitive conduct by firms. prohibit anticompetitive mergers, and it creates an independent institution for enforcement of the law (consisting of a Commission and a Tribunal).80 Although having a competition law and authority is an important step forward, competition regulation must also include secondary regulations and guidelines that clarify and solidify how the law will be applied by the FCCPC. 79 One of the factors driving the adoption of the FCCPA appears to have been anticipation of the AfCFTA, which was due to include a regional competition policy protocol. The delay in passing the Act was in part due to opposition of certain sector regulators that were uncomfortable with the concurrent mandate that would be held by the FCCPC. This highlights that international cooperation can improve prospects for reform, but when considering the political economy of reform it is important to consider incentives of other government bodies and not just the private sector. 80 Federal Competition and Consumer Protection Act, Part II and Part VII, available at: https://www.fccpc.gov.ng/guidelines/documents/. 82 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE Ì There are some relevant gaps remaining in the This would ensure that potentially harmful transactions competition law framework are caught, where the turnover of the target may not be significant, yet it could still have significant market Secondary regulations and guidelines on mergers have power. Defining thresholds in terms of assets has the been published bringing more certainty and clarity to advantage that it could pick up cases where a firm is not enforcement regarding merger review. In September generating significant turnover but has significant assets 2019, the Notice of Threshold for Merger Notification in terms of data or intellectual property. was published, establishing firm’s turnover-based thresholds to evaluate if a merger is deemed notifiable Key secondary regulations and guidance such and subject to review before being implemented. The as market definition guidelines, regulations on FCCPC has also issued Merger Review Regulations restrictive agreements and trade practices, and with ancillary instruments to govern the notification regulations on abuse of dominance that were missing and review of mergers and merger review guidelines, have been developed with inputs from the World which describe the Commission's general approach to Bank Group. These complementary guidelines and administering the Act's merger review process. These regulations were adopted in early 2022 and will help are important steps in establishing a clearer and solid increase the predictability and clarity of the framework enforcement framework for merger review in Nigeria. for competition enforcement in Nigeria. It is important This will help reduce delays and uncertainties for firms to notice that these regulations contemplate a special wishing to undertake such transactions. Nevertheless, focus on digital markets, which will continue to be there are still some opportunities to improve the highly relevant in the coming years, and which need secondary regulations. Current thresholds established tailored provisions to address specificities that may affect in Nigeria provide for a combined threshold “or” (that conventional substantive assessments of anticompetitive is, in the alternative) an individual threshold for the practices. The implementation of the new provisions on undertaking to be acquired only, which could lead to anticompetitive agreements and abuse of dominance will overenforcement and undue burden on the FCCPC, also require capacity building of the FCCPC, as well as since the Commission would need to review mergers enhancing awareness of private sector stakeholders to that are not likely to lessen competition in which a large increase compliance. Other clarifications that are still enterprise that itself exceeds a threshold makes a de needed are a detailed explanation on leniency policy minimis acquisition of a much smaller enterprise. and procedures for leniency applications, requirements, and a process for engaging in settlements, details In addition, relative to the size of Nigeria’s economy, on investigation tools of the FCCPC, including: the proposed combined local turnover threshold of complaints; inspections (with and without notice); N1 billion appears to be extremely low. Increasing requests for information; witness interviews; and internal the merger threshold amounts would help reduce the procedural guidelines of the FCCPC. potential burden on the Commission derived from merger review, especially as they are capacity constrained due to being a young authority (see below). This would Ì Some provisions in the law go against good practice also avoid discouraging transactions, especially those of small magnitude, due to not imposing additional Against good practice, there are provisions for price administrative burden on businesses. This issue regulations in the Competition Act. These should notwithstanding, the merger regulations in Nigeria be removed, or provisions should be put in place that should look to include special provisions to deal with limit the use of incentives to specific situations with a mergers in nascent markets, such as digital markets. clear rationale. The FCCPC will also need to define and Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 83 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 clarify how public interest provisions in the law (e.g., the competition law itself does not apply.83 The CBN employment considerations) will be used to prevent must be well-capacitated in competition issues to ensure these provisions from being used in a way that would that competition is adequately regulated in the financial reduce the law’s effectiveness. Additional guidelines sector. on how dominance will be assessed by the FCCPC are needed to bring clarity to firms and reduce uncertainty regarding the conduct that these firms might undertake Ì Institutional factors related to independence in markets in Nigeria. and capacity building and efficiency are needed to strengthen enforcement of the competition law in Nigeria Moreover, the law currently provides for some exemptions for professional services that should Successful implementation of the competition law be reconsidered. There will be a need to harmonize in Nigeria will rest on the new FCCPC being able the Public Procurement Act 2007 and the FCCPA to operate independently of political influence and (e.g., the Public Procurement Act expressly excludes having sufficient capacity, tools and resources to public officers from the application of collusion and operate efficiently. The FCCPC has been formed bid-rigging offences, which the FCCPA does not) and from the former Consumer Protection Commission, ensure cooperation between the agencies to ensure but it currently lacks sufficient staff to implement anticompetitive practices in the public procurement its competition mandate. Capacity will be needed to arena are effectively curtailed. Finally, the FCCPC holds implement tools to combat anticompetitive behavior concurrent jurisdiction on ex post competition matters effectively (e.g., the ability to conduct raids, to summon with sector regulators. As such, it will be necessary to parties, to enter into settlements, and to implement develop details of how the agencies will work together, a leniency policy). There has also been some concern particularly in the areas of aviation, telecoms, and over the degree of independence that the FCCPC will power.81 enjoy from the FMITI and safeguards against political appointees being put into decision-making positions will The Financial Institutions Act published in November be key. 2020 also exempts the financial sector from the provisions of the FCCPA except for merger review. What makes a competition authority independent This means the competition authority will not be able and efficient? Independence is the ability to make sound to enforce competition law when it comes to activities technical decisions independent of any bias arising from performed by licensed banks or other financial undue influence from external parties (both public and institutions licensed by the CBN.82 The Financial private) and internal conflicts of interest. Efficiency is Institutions Act establishes that banks and other financial the ability to identify and resource the most relevant and institutions must comply with competition standards demanding issues according to each authority’s policy and obligations established in extant regulations and that goals and allocate resources accordingly in a timely the CBN has the power to issue regulations, guidelines manner. As empirical evidence has found, achieving and policies to promote competition in the sector but independence and efficiency of the FCCPC can 81 This has been an area of contention for regulators in discussions around the Financial Institutions Act and was a key reason for the delay in its enactment. 82 Section 65 of the Banks and other Financial Institutions Act 2020. Available at: https://www.cbn.gov.ng/out/2021/ccd/bofia%202020.pdf. 83 Section 30 of the Banks and other Financial Institutions Act 2020. Available at: https://www.cbn.gov.ng/out/2021/ccd/bofia%202020.pdf. 84 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE boost productivity in Nigerian markets (Voigt, 2009; FIGURE 5.10. ACF-WBG IBCA – Independence indicator Buccirossi et al., 2013).84 As well as helping the FCCPC Score for pro-independence features adopted to implement the law against firms, independence is 100 important to ensure the FCCPC can act as an impartial 30 92 Proportion of pro-independence features voice in the policy arena that can provide sound evidence 25 77 76 14.0 73 69 69 13.5 to ensure that industrial (and other) policies do not place 65 20 60 57 57 57 56 12.0 12.0 11.0 an undue burden on consumers and the economy. The 9.0 3.5 50 9.0 7.0 45 5.0 45 15 8.0 5.0 42 4.0 42 6.5 8.0 2.0 39 8.5 10.0 law explicitly empowers the FCCPC to opine on the 6.0 10 16.0 14.1 competition impact of government policies, so it is well 12.5 11.8 11.7 11.5 11.1 10.9 10.8 10.7 10.1 9.7 9.0 5 8.6 8.5 8.4 7.6 7.5 6.9 positioned to place this role as long as it is not hijacked 0 by vested interests. Various institutional design tools can he o Ke rk N ya So au ria h us Za rica ts bia M a E A rk wa t Se F ni G lles ba a Al w e or ia am o An bia M la i aw Bu Es gyp yc ass O n m bi N cc ES in ta M er go a n ut riti C wa M ge b Bo m Zi m i hm al o Af g a i be used to promote independence and efficiency. a nc Be J ACF-WBG IDB-External Independence J ACF-WBG IDB-Internal Independence Source: ACF-WBG IDB Cameroon, Congo, and Tunisia are not calculated because more than 10% of the ACF-WBG IDB variables were missing. Ì Level of internal and external independence of competition authority vs benchmark and peers also be enhanced by establishing cooling-off periods that prevent key officials from taking conflicting Nigeria’s competition authority and law perform positions immediately after leaving their roles with relatively well on independence features compared the authority, commonly with the private sector. The with African peers, but several good practice FCCPC currently does not impose cooling-off periods independence features are still missing85  (FIGURE for prosecutors or adjudicators. Imposing cooling-off 5.10). For example, there is scope to reduce the risk periods would mitigate risks of capture or undue use of undue interference from external stakeholders of confidential information. Kenya and the Common (government and the private sector) in the decision- Market for Eastern and Southern Africa (COMESA) making of the authority by strengthening protocols already implement such a rule. Finally, the authority’s for the engagement of officials responsible for financing methods can also impact independence investigation, prosecution and adjudication of both from political influence, with allocations directly from practices and mergers. Granting key officials in the National Assembly (where power is more dispersed) FCCPC with fixed terms could provide them with job generally holding less risk for influence than through stability that mitigates external pressure, particularly allocation by a minister or the President. The FCCPC’s from other government entities. Although fixed terms funding could combine National Assembly approvals exist for adjudicators in Nigeria, this feature could be with revenues collected from the private sector through extended to heads of prosecution. Kenya, Malawi, and service charges for merger review to diversify funding Mauritius, to mention a few, have already adopted sources (Kovacic and Hyman, 2012; Jenny, 2016). In this rule. External independence of the FCCPC could Africa, COMESA’s Competition Commission and South 84 Using a dataset on 97 countries, Voigt (2009) estimates the effect of the quality of competition law and its enforcing institutions on productivity and finds a positive relationship between the two variables. The result remains valid even if developing countries are analysed separately. Buccirossi et al. (2013) found a positive and significant relationship between the quality of institutional and enforcement features of competition policy and TFP growth for 22 industries in 12 OECD countries. 85 Based on the ACF-WBG Institutional Benchmark of Competition Authorities (IBCA) Nigeria performs well with respect to its peers in Africa when it comes to independent policy implementation but remains considerably below the good practice benchmark. Nevertheless, in terms of efficiency of competition law enforcement, Nigeria is second to last among its regional peers. Factors considered to measure independence are: Mechanisms and criteria for the appointment and removal of personnel of competition authority; budget allocation and financing of competition authority; influence of government in prosecution efforts and decisions; actors responsible for merger reviews; separation of powers between adjudicatory, prosecutorial, and decision-making instances, among others. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 85 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Africa are examples of jurisdictions that charge fees for financed partly by the sanctions it imposes. This can merger reviews, thus contributing significantly to their generate conflicts of interest in decision-making. respective budgets. The FCCPC recently increased the fees to be paid for merger notifications, which (when applied judiciously) can help in lowering the FCCPC’s Ì Efficiency of the Nigerian competition authority in dependence on government budget for its operation.86 resolving anticompetitive practice cases, mergers and advocacy efforts The fact that the executive branch of government has Efficiency88 of the FCCPC is low relative to its regional the right to intervene in investigations beyond its peers. While the FCCPC already uses some pro- right to petition/complaint undermines the FCCPC’s efficiency mechanisms, such as agency-wide performance investigative independence in anticompetitive indicators and agency-wide screening practices to practice cases, mergers, and advocacy efforts. It allocate resources, it lacks staff performance indicators would be important to ensure the presence of clear for merger reviews and anticompetitive practices. rules of engagement for cases where ministers do The use of well-designed performance indicators can intervene (for example, objective criteria, transparency, create incentives for good staff performance. However, due process, along with checks and balances). In the jurisdictions should be cautious about the types of United Kingdom, for example, the Secretary of State can performance indicators that they implement to avoid intervene in public interest mergers following specific introducing bias into the investigative and decision- circumstances, as defined by the legislation (for example, making process by linking performance to the type of national security, plurality of the media, and the stability decision made in a case, for example, the sanctions and of the UK financial system in cases where business deals restrictions imposed. In addition, while it does have meet merger thresholds).87 Developing mechanisms to screening practices for complexity to allocate resources guarantee both structural and financial independence in mergers, it does not have these for anticompetitive from the executive branch, including securing diversified cases. Implementing strategies capable of assessing the sources of budget can help the FCCPC to achieve content, relevance, and resource needs, could inform complete independence from the FGN. Examples of better prioritization in enforcement efforts against African jurisdictions with both financial and structural anticompetitive practices. In addition, the FCCPC does independence from the executive branch include not implement independent budget allocation for its Mauritius and Botswana. various mandates. This creates a risk that demand-driven non-antitrust mandates, such as consumer complaints, In terms of internal independence, Nigeria scores at or even antitrust mandates, such as merger filings, could the benchmark level in almost all dimensions but has disproportionately drain resources that would otherwise room of improvement. Internal independence relates to be available for ex officio strategic activities, such as how institutional design can mitigate conflicts of interest the identification and sanctioning of anticompetitive within the Commission, particularly between its different practices and competition advocacy. The authorities in functions such as prosecution and adjudication, focusing Mauritius, Egypt and Zambia are examples of agencies in on aspects of separation of powers. One shortcoming comparator countries that do perform budget allocation of the FCCPC in this respect is that the adjudicator is by mandate. 86 The Federal Competition and Consumer Protection Act, 2018 Merger Review (Amended) Regulations, 2021. 87 Recently, as a response to the COVID-19 pandemic, public health-related mergers have also become part of public interest initiatives. See the Order by the Secretary of State, The Enterprise Act 2002 (Specification of Additional Section 58 Consideration), Order 2020 No. 267. There is also a possibility to intervene in cases that fail to meet merger thresholds for a narrow set of circumstances (for example, involving the military). See Competition and Markets Authority, “Mergers—the CMA’s Jurisdiction and Procedure: CMA2.” 2014. 88 Efficiency considers factors such as: total staff and budget; criteria for case assignment to prosecutors; screening procedures for case/mergers to allocate resources for their investigation; dedicated personnel; number of cases/mergers handled and decided, length of investigations, budget available for case prosecution, among others. 86 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE The FCCPC lacks staff specialization in investigation 5.2.2  Industrial policies across the and prosecution of anticompetitive practices, economy have introduced competition merger review, and in advocacy efforts. As a nascent distortions to markets in Nigeria due competition authority, capacity building of the FCCPC’s to protectionism and influence of large personnel and its specialization will be fundamental players to increasing its efficiency. Competition authorities in peer countries such as Kenya, Egypt, and Mauritius Ì Industrial policy, principally due to its protectionist have specialized staff members for the investigation and stance, has introduced market distortions into Nigerian markets prosecution of anticompetitive practices. Zambia and South Africa have specialized staff for anticompetitive Beyond competition law enforcement, Nigeria would practices and for mergers. The FCCPC also lacks the benefit from reviewing its industrial policies across legal capacity to settle cases at either the prosecution the economy to minimize competition distortions. or the adjudication phases of an anticompetitive Nigeria’s approach to industrial policy has had a strong enforcement case. The same happens in terms of the focus on import substitution strategies, including several legal capacity of the FCCPC to negotiate remedies policies that create an unlevel playing field between during either the analysis or the adjudication phases of domestic and foreign firms, inhibit investment, and that a merger review. These capacities are part of competition can raise prices for households and downstream firms. authorities’ legislation in Angola, Zambia and South These include: Africa. The use of settlements could save time and financial resources required for efficient enforcement. • Local content rules  exist in a number of sectors. Having this possibility could improve the FCCPC’s The most far-reaching requirements have been in efficiency, reduce its burden and increase its capacity to oil and gas.89 But other important sectors have also handle a larger number of cases. included local content targets for firms. Guidelines for the ICT sector, for example, set out a target of FIGURE 5.11. ACF-WBG IBCA, results of the efficiency indicator 50 percent local content and all ICT companies are Score for pro-independence features adopted required to be registered as Nigerian entities with predominantly Nigerian representation.90 In 2020 2 100 95 15 Proportion of pro-independence features and 2021, a Nigerian Local Content Development 87 14 2 85 2 13 2 80 77 77 12 and Enforcement Commission Bill was under 2 2 72 1 67 11 2 64 63 2 2 1 62 10 discussion in the National Assembly. This Bill seeks 5.3 6 1 57 55 9 5.5 2 5.5 1 48 4.5 8 2 1.8 1 45 2 1.6 44 to expand the comprehensive frameworks and 4 4.5 1 40 5.5 7 3.5 2.3 1.80.5 2 1 35 3.4 4.8 5 3.5 6 5 schemes for national content requirements that were 4 4 2.5 3 2.8 1.8 3.5 3.5 4 3.3 2.5 3 1.5 2.8 3 previously applicable to oil and gas to other areas 2 2 2 1.1 1.75 2 1 2.5 2 2.5 3 3 3 3 3 1 2 2 2 2 2 2 2 2 0 of the Nigerian economy, particularly to the solid Za ark So sw bia Bo Afr i ts ica M a Ke A Se Ang a h a rk ba s a we au o or s am o Al bia M ria Eg i ig t G eria a h n aw N yp Bu Zim elle M ritiu O n ny yc ol M ass N cc bi ES ut ata minerals mining, construction, power, manufacturing C wa ge in b E m i am hm al o F nc and health sectors.91 Executive Order 003 also Be J Authority-wide J Anticompetitive practices J Merger control J Advocacy requires all ministries, departments and agencies Source: ACF-WBG IDB Cameroon, Congo, and Tunisia are not calculated because more than 10% of the ACF-WBG IDB variables were missing. to grant preference to local manufacturers of goods 89 Nigerian Oil and Gas Industry Content Development Act of 2010. 90 Guidelines for Nigerian Content Development in the ICT sector, NITDA, 2013. https://www.pwc.co.za/en/assets/pdf/nigeria-ict-local-content- guidelines-alert.pdf 91 Proposed Nigerian Local Content Development and Enforcement Commission Bill. Available at: https://placbillstrack.org/upload/HB621.pdf; KPMG 2021, “Commentaries on the Nigerian Local Content Development and Enforcement Commission Bill 2020”. https://assets.kpmg/ content/dam/kpmg/ng/pdf/tax/commentaries-on-the-nigerian-local-content-development-and-enforcement-commission-bill-2020.pdf Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 87 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 and service providers in their procurement of goods duty on automotive imports and imports of vehicles and services.92 This directive also states that at least are restricted to one per vehicle manufactured in 40 percent of expenditure for the procurement of a Nigeria.99 Such trade restrictions are viewed as a number93 of items must be on locally manufactured “quick fix” for issues facing an industry and are goods. This Executive Order gives local suppliers up not typically time-bound to limit the protections to 30 percent price advantage in tender processes provided. and has been particularly enforced in support of the cotton, garment and textile industry. Technical • Restrictions on foreign companies entering the requirements in public tender documents typically market without first incorporating a Nigerian refer to standards of the Standards Organization of company  are contained in provisions in the law Nigeria, which in some cases are designed specifically governing the corporate sector (Companies & Allied with the aim of increasing local content in public Matters Act 2020).100 Foreign firms may apply for an procurement as per Executive Order 003. exemption of this rule but only if they are “invited to Nigeria by or with the approval of the FGN to • Import bans, quotas, and high effective duty execute any specified individual project.”101 The rates on imports into strategic sectors a  re imposed granting of exemptions to certain foreign companies to boost the competitiveness of local industries. on a case-by-case basis might create an unlevel Import bans are in place in Nigeria for 26 groups of playing field in Nigerian markets. items (including food and household items, bagged cement, and certain medications),94 which raise Nigeria’s protectionist stance and its use of trade the cost of living, particularly for the poorest95 and barriers as part of its industrial policy was one reason reduce government revenues.96 There is also a list for its recent hesitation in joining the AfCFTA. This of around 40 items that are ineligible for foreign was despite a recent report by the Nigerian Office for exchange, which acts as a de facto import restriction Trade Negotiation noting that Nigeria would be one (including on foods such as rice, vegetable oils, of the top three beneficiaries on the continent from and tomatoes, and manufactured goods such as the elimination of tariffs and the reduction of NTBs soap, textiles, cement, NPK fertilizer, etc.).97 In between African states. It is also widely considered that agriculture, wheat, sugar, rice, tomato paste, and salt Nigeria’s decision to close all of its land borders to trade have effective rates of 85, 75, 70, 50 and 70 percent, in August 2019 was a reaction to the potential threat of respectively.98 In manufacturing, there is 70 percent import competition posed by the AfCFTA.102 Nigeria 92 https://interior.gov.ng/index.php/84-press-release/267-executive-order-003-will-boost-the-economy-dambazau. 93 These products are: uniforms and footwear, food and beverages, furniture and fittings, stationery, motor vehicles, pharmaceuticals, construction materials, and information technology. https://interior.gov.ng/index.php/84-press-release/267-executive-order-003-will-boost-the-economy- dambazau. 94 Import Prohibition List https://trade.gov.ng/tariff/prohibitionList_Import.do. 95 It is estimated that four million Nigerians could leave poverty if such bans were lifted and replaced by tariffs set at a level applied to similar products. See Africa Trade Policy Notes, March 2012 – Import Bans in Nigeria Increase Poverty. 96 https://www.export.gov/article?id=Nigeria-Prohibited-and-Restricted-Imports. 97 https://www.cbn.gov.ng/out/2015/ted/ted.fem.fpc.gen.01.011.pdf. 98 https://www.export.gov/article?id=Nigeria-Market-Overview; https://www.export.gov/article?id=Nigeria-Import-Tariffs. 99 Ibid. 100 Companies & Allied Matters Act 2020, Chapter 3-Foreign Companies, available at: https://www.cac.gov.ng/wp-content/uploads/2020/12/CAMA- NOTE-BOOK-FULL-VERSION.pdf?__cf_chl_managed_tk__=pmd_VECC8Tj.isXseky7btoeWKComOZly7k6MVmCFtnPYs4-1631802423- 0-gqNtZGzNAvujcnBszRGR. 101 Companies & Allied Matters Act 2020, Chapter 3-Foreign Companies, Para. 80., available at: https://www.cac.gov.ng/wp-content/ uploads/2020/12/CAMA-NOTE-BOOK-FULL-VERSION.pdf?__cf_chl_managed_tk__=pmd_VECC8Tj.isXseky7btoeWKComOZly7k6MVm CFtnPYs4-1631802423-0-gqNtZGzNAvujcnBszRGR. 102 The FGN states that the border closure was intended to stop illegal smuggling, including of agricultural products such as rice. 88 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE did eventually ratify the AfCFTA at the end of 2020, including several measures that could distort the level although some of its borders remain closed.103 It is worth playing field if not carefully designed, including tariff noting that three firms were granted ad hoc exemptions measures or import bans in sectors of focus, lower tariffs to the border closure, including Dangote and BUA, on inputs (this can favor large firms since they are not leading to claims of unfair preferential treatment from automatic and smaller firms often lack the knowledge other firms.104 Such advantages targeted at specific, or capacity to request exemptions from the Ministry of usually larger firms are frequently cited as a concern Finance), tax incentives/benefits,106 or direct government of smaller firms and is the subject of discussion in the financing (such as subsidized loans from the CBN following sub-section. to specific players or industries). The Manufacturers Association of Nigeria (MAN)—also chaired by a representative of Dangote—is also a strong advocate Ì Large incumbent players in several sectors of for trade protection measures to consolidate backward Nigeria’s economy exercise significant influence industrial policy. MAN also had significant input on on the design of industrial policy and regulation affecting competition in markets negotiations for the AfCFTA, stating that it would negatively affect the manufacturing sector (African Certain large players appear to exercise significant Review, 2018; Business Day, 2020). influence over the way Nigeria designs its industrial, trade and investment policies, placing these firms In addition, the standards-setting process also at an advantage over those that do not have the appears to be driven partly by requests from private same level of access to government, protecting the sector players, leaving it open to influence from market position of larger players to the detriment of larger players. Standard-setting disputes have occurred consumers. Nigeria’s key plan for industrialization, the in sectors such as cement, in which a new standard “Nigeria Industrial Revolution Plan”, launched in 2014 that favored the dominant player in the market was set has been implemented by the Nigeria Industrial Policy and competitors filed a suit to challenge the Standards and Competitiveness Advisory Council (NIPCAC).105 Organization of Nigeria (SON) order.107 SON appears to The NIPCAC, established in 2017, is chaired by the be aware of issues relating to standards-setting processes Vice President but runs on a public-private model with being driven by large players and has revised the process Aliko Dangote chairing the private sector group. Other for standard-setting by posting proposed standards private sector members appear to be mainly made up of online in an attempt to achieve inputs from a broader some of the largest firms. NIPCAC has played a key role range of smaller firms and stakeholders.108 in advocating for protections and incentives for industry, 103 https://nannews.ng/reps-shut-down-motion-to-reopen-borders/. 104 https://www.bloomberg.com/news/articles/2020-11-09/nigeria-exempts-dangote-cement-from-land-border-closure. 105 NIPCAC focuses on the following priority areas: 1. Infrastructure – Broadband, Power and Roads 2. Finance 3. Trade and market access 4. Policy and regulation 5. Technology 6. Skills 106 As an example, NIPCAC recently achieved the signing of a tax incentive for Road Infrastructure Development where the first recipients have included several members of NIPCAC. 107 Lafarge Cement alleged that the directives favor Dangote which created the wrong impression that the 32.5 grade cement produced by Lafarge is not suitable for buildings, only suitable for plastering. Lafarge alleged that the new standards are a way to allow Dangote to monopolize the market. https://www.worldcement.com/africa-middle-east/02062014/son_restricts_32_5_grade_cement_to_plastering_work_285/; https://guardian.ng/ property/c25-property/committal-proceeding-trails-lafarge-son-cement-classification-controversy/. 108 https://son.gov.ng/standards-development. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 89 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Various forms of state aid to firms—such as subsidized insurance and aviation handling, but privatization financing and investment incentives—are sometimes efforts continue. The presence of firms with state designed in a way that benefit certain connected or holdings can hold risks for competition where they large players. While national tax policy explicitly states receive regulatory or financial advantages not available to that tax-based incentive schemes “should not promote the private sector. In those markets, state participation monopoly such as entry barriers or otherwise prevent can crowd out the private sector and distort prices on the competition”, potential distortions to the level playing basis of subsidies received from the state, with the state- field are not explicitly considered in incentive design, owned enterprise having little incentive to become more nor is additionality. “Special incentives” are available for efficient. Indeed, it is believed that several enterprises strategic or major investors and are negotiated case-by- that have been earmarked for privatization by the Bureau case.109 These do not appear to be publicly available. The of Public Enterprises have been loss-making.114 In Pioneer Status Incentive,110 designed and managed by agricultural input markets, there are claims that public the Nigerian Investment Promotion Commission, has sector institutions, such as the Agricultural Development seen reports of abuse and double-dipping by firms,111 Projects, have crowded out private sector players by which led to restructuring of the scheme in recent offering subsidized seed.115 years to improve transparency, including publishing the names of recipients, publishing new application Significant privatization efforts have taken place guidelines, and the delegation of some approval powers under the Public Enterprises (Privatization and from the FMITI to the Nigerian Investment Promotion Commercialization) Act of 1999, spearheaded by Commission.112 Going forward, further reforms on the Bureau of Public Enterprises, which has led showing impact and examining opportunity costs of the to an increase in FDI flows to Nigeria.116 As these incentives would be valuable. However, complaints that efforts continue,117 it is important that privatization the scheme excludes certain firms remain. For example, schemes are carefully designed to ensure competition in the minimum tangible assets required for eligibility have selecting a buyer, and to complement the process with been raised significantly (to N100 million or around parallel regulatory efforts to improve the level playing US$280,000),113 which may disadvantage SMEs and field. This is particularly important given that, in the tech companies (that typically have more intangible past, privatization was seen as a conduit for cronyism, assets). Privatization and PPPs could be conducted with with public assets sold cheaply to politically connected greater consideration of the impacts on competition in persons. Nigerian markets. Politically connected business elites have pushed The FGN maintains holdings in several enterprises privatization efforts in Nigeria during times of in several markets, including manufacturing, and external shocks and pressures. In some cases, this has 109 https://pwcnigeria.typepad.com/files/nipcfirs_compendium-of-investment-incentives-in-nigeria_nov2017.pdf. 110 A tax holiday which grants companies full income tax relief to profits made from engaging in eligible activities for an initial period of three years, extendable for one or two additional years. 111 Dangote Cement, for example, was widely considered to have staggered investments in order to extend the period of the tax holiday received. 112 https://pwcnigeria.typepad.com/tax_matters_nigeria/2019/04/nipc-has-published-reports-of-pioneer-status-incentives.html. 113 Application Guidelines for Pioneer Status Incentive, available at: https://nipc.gov.ng/wp-content/uploads/2020/08/Pioneer-Status-Application-for- Guidelines-Final.pdf? 114 https://www.von.gov.ng/bpe-to-sell-shares-of-privatised-state-owned-companies/. 115 http://documents.worldbank.org/curated/en/909651468193779954/pdf/949650WP0P12860Country0Study0R20ST.pdf. 116 Over 140 public enterprises have been reformed and/or privatized in various sectors of the Nigerian economy. (Bureau of Public Enterprises Presentation, 2019). More recently, the Bureau of Public Enterprises has disclosed plans to sell off 10 SOEs through Initial Public Offerings over 2019 with the aim of funding the national budget. Affected sectors include aviation, insurance, energy and minting and printing. 117 https://bpe.gov.ng/category/transactions/on-going-transactions/. 90 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE led to the favoring of certain players over others and have developed state-specific laws and frameworks the creation of private firms with considerable market pertaining to PPPs. power. One of the most well-known examples of this was the sale of a state-owned cement plant along with • While the Infrastructure Concession Regulatory limestone quarries to Dangote in 2000 (Usman, 2020). Commission acts as the agency that regulates PPP Privatization without considering mechanisms to induce procurement, it lacks the capacity to compel public competition in newly liberalized markets can defeat its agencies to respect the terms of PPP contractual purpose of enhancing efficiencies and growth. Efforts agreements. In practice, the FGN has in the past such as the telecommunications sector liberalization reneged on or canceled several high-profile projects, in the early 2000s were more successful in establishing for example, the Lagos Ibadan Expressway Bi- liberalized markets, since the regulatory environment Court Highway Services Project, the Lekki-Epe Toll was set more clearly to enhance competition. Pro- Concession Road, and the Nigeria Air project.121 competition policy and regulation are fundamental to avoid entrenching the market power of incumbents and • Open tendering is the default procedure available enhance the positive effect that privatization brings to for PPP projects. However, the Infrastructure growth and development (see Section 5.3). Concession Regulatory Commission Act provides that competitive bidding may not be necessary where Nigeria’s privatization and commercialization there is a sole bidder or where only one player meets program is now refocusing toward public-private the pre-qualification requirements. For example, if partnerships (PPPs), including water resources, only one project proponent meets pre-qualification railways, airports, and roads, and it will become requirements, then the procuring authority may particularly important for the PPP framework undertake direct negotiation. Lack of transparency to be conducive to competitive and transparent in the selection process in PPPs has been a concern. procedures. Addressing some of the following issues in For example, the 2019 selection process for the PPP the PPP framework could help to channel more private project to create the Single Window and E-Customs investment into infrastructure:118 system generated some controversy due to allegations around a lack of due process. In particular, it has been • The PPP framework is complex and there is no argued that there were no tenders or advertisement unifying PPP Law. Instead, the framework consists before the selection process.122 of several different documents including: the Infrastructure Concession Regulatory Commission • Market assessments prior to tendering a PPP are Act 2005, the National Policy on Public Private important to ensure that tender qualification criteria Partnerships 2009 (N4P); the Public Procurement and procedures are correctly set to competition. Act 2007; Fiscal Responsibility Act Nigeria 2007; Although the Public Procurement Act contains and the Public Enterprises (Privatization and some provisions requiring market assessments before Commercialization) Act 1998.119 There are also procuring, market assessments are reportedly not overlaps with applicable sectoral laws, which can done in practice when identifying and preparing a cause confusion.120 Meanwhile, a number of states PPP. 118 Drawing partly from: Procuring Infrastructure Public-Private Partnerships 2018 In Nigeria https://bpp.worldbank.org/content/dam/documents/ bpp/nigeria.pdf. 119 https://bpp.worldbank.org/content/dam/documents/bpp/nigeria.pdf. 120 The Utilities Charges Commission Act, the National Inland Waterways Act 1997 and the Highways Act 1971. 121 This is despite the fact that the Infrastructure Concession Regulatory Commission Act provides that no agreement reached in respect of the Act will be arbitrarily suspended, stopped, cancelled or changed. 122 https://www.thisdaylive.com/index.php/2021/06/11/whither-e-customs-project/. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 91 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 • Transparency and the level playing field could be further deepening pro-competition reforms can help to enhanced by publishing tender documents online continue the initial success of the liberalization process (currently this is not mandatory), developing of the telecommunications sector. standardized PPP model contracts (currently these do not exist), obliging the procuring authority to publish  n this section, the ICT and digital sectors are I the PPP contract once awarded, and developing an discussed as an example of where government policies obligation to include the grounds for the selection of or regulations that promote competition would help the winning bid in the notification of the result of open the market to greater investment, spurring greater the PPP procurement process. innovation and more pro-growth market dynamics. • Renegotiation of PPP contracts is possible under current laws with the approval of the procuring 5.3.1  In the ICT sector, Nigeria would authorities. A sound framework may include more benefit from a pro-competition framework expressly regulated limits on renegotiation. and regulation for broadband rollout • There is currently no standstill period after the Greater competition in broadband services could contract award and before the signing of the contract help increase coverage and deployment of higher to allow unsuccessful bidders to challenge the award bandwidth services and bring prices of data services decision. down. Nigeria’s fixed broadband penetration is relatively low compared with peers (WBG, 2019). The national backbone is focused on major urban areas and 5.3  Sector-specific barriers to competitive intercity routes, while last-mile connectivity in Nigeria market dynamics: Examples from ICT is largely through mobile networks with relatively low and digital financial sectors investments made in fixed infrastructure within the past two decades.123 Even with 3G mobile networks, Nigeria’s telecommunications sector was subject most areas of Nigeria are being served by only one to a liberalization process in the early 2000s that mobile network operator (MNO), while 4G remains successfully created the largest mobile market in scant beyond the largest urban centers.124 Looking at Africa. The sector was opened to private firms and three concentration at a national level, while the Herfindahl- players entered the market, helping the sector’s growth Hirschman Index (HHI) in Nigeria’s mobile market in terms of service penetration, contribution to GDP is below many of its peers it is above the threshold and government revenue (Usman, 2020). This process considered to signify a highly concentrated market. The helped Nigeria to catch up with neighboring countries largest two operators in Nigeria, MTN and Globacom, in terms of telecommunications network development. account for more than 70 percent of the 3G and 4G Telecommunication liberalization has increased market. High concentration can lead to lower coverage employment, total revenue accruing to the government and quality, as well as higher prices. Indeed, coverage of in the form of tax and other charges from the telecom 4G services is relatively low in Nigeria when compared sector, and local and foreign direct investment into the with its peers and so is its market penetration. In country (Akinyomi and Tasie, 2011). Nevertheless, addition, mean mobile download speeds in Nigeria are 123 According to the National Broadband Plan 2020–2025, Nigeria’s last-mile Fiber to the Tower connection rate is lower than other African countries. National Broadband Plan 2020–2025. Available at: https://www.ncc.gov.ng/accessible/documents/880-nigerian-national-broadband- plan-2020-2025/file. 124 National Broadband Plan 2020–2025. Available at: https://www.ncc.gov.ng/accessible/documents/880-nigerian-national-broadband- plan-2020-2025/file. 92 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 5.12. Herfindahl-Hirschman Index in Nigeria's mobile markets Market Concentration (HHI >2500 considered highly concentrated) HHI 3G HHI 4G Comoros Comoros India Mauritania Angola Senegal Kenya Angola Benin Kenya Zimbabwe Congo; Dem. Rep. Cameroon Zimbabwe Malaysia Ghana Ghana Benin Indonesia Cameroon Mexico Mexico Mauritania India Zambia Vietnam Senegal Zambia Egypt Tanzania Nigeria 3,116 Nigeria 2,881 Vietnam Indonesia Congo; Dem. Rep. Egypt Brazil Brazil Tanzania Malaysia 2,500 2,500 0 2,000 4,000 6,000 8,000 10,000 0 2,000 4,000 6,000 8,000 10,000 FIGURE 5.13. Network coverage (by population) and market penetration Network coverage and market penetration Percent 120 100 90 80 70 60 66 50 40 30 20 10 10 0 a t il a o a am a l na ia os n a e a n ep o; la ia ga yp az di si ic ny si oo bi bw ni ni go an . er g or ha ne ex ay In Eg ne m za Be tn on Br Ke er ig ba An rit om Za .R e G M al do n Se em C am N au Vi m Ta M C In Zi M C D J 4G network coverage; by population J Market penetration; 4G connections Source: GSMA Intelligence https://data.gsmaintelligence.com/data/operator-metrics. FIGURE 5.14. Mean mobile internet download FIGURE 5.15. Number of fixed broadband speed subscribers Mobile internet download speed (2019, Mbps) Fixed broadband subscribers (2017; per 100 people) 9 14 13.6 8.40 8 7.62 12 7 10 6 8 5 4 6 3.20 3.34 3 4 2 1.56 1.62 2 1.4 1 0.6 0.1 0 0 Nigeria Sub-Saharan Southern World Nigeria Eqypt Ghana Rwanda Kenya South Africa Africa Africa average Source: Nigeria National Broadband Plan 2020–2025. Source: Nigeria National Broadband Plan 2020–2025. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 93 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 very low compared with peer countries such as South recipients. On the former point, addressing challenges Africa, Rwanda, Kenya and Ghana. The number of fixed faced by firms on obtaining Right of Way could help to broadband subscribers is considerably lower compared ease new entry across regions. with the world average and below peer countries in Africa. Meanwhile, prices of 1GB of data in Nigeria are Granting of Right of Way (RoW) should be higher than in countries such as Egypt, Rwanda, and transparent and standardized across states to provide India.125 Additional competition in ICT markets could fiber investors with certainty and incentivize entry help increase coverage and bring prices of ICT services to help reach underserved zones. Investors have faced down. Outlined below are several (non-exhaustive) issues with being granted RoW to lay fiber in state- examples of policy and regulatory factors that may be owned land due to lack of legislation on RoW. A number hindering entry, investment, and competitive market of state governors have refused the approval of RoW dynamics in ICT markets in Nigeria. to, or demanded high fees from, telecoms operators deploying infrastructure in their states, until the NCC intervened on behalf of operators. In 2018, IHS, one Ì Pro-competition licensing for infrastructure of the firms granted an infrastructure service provider providers and equal access to Right of Way could license, returned the license to the NCC over difficulties help foster investment in the rollout of broadband networks in securing RoW approval to deploy infrastructure in the North Central zone.126 In this regard, one positive step In an effort to stimulate infrastructure investment, forward in the rollout was an agreement between state the Nigerian Communications Commission (NCC) governors on a harmonized RoW charge. However, this has tendered a single license to roll out backbone remains an informal agreement, and only some states fiber in each of seven designated regional zones. have followed it in practice, and may benefit from being These networks would be regulated on an open access formally regulated to increase certainty.127 In addition, basis to mitigate competition issues arising from the the National Broadband Plan targets agreement with local bottlenecks created by this form of licensing. state governors on a standardized RoW fee across all However, to date, these regional license tenders have not states, which would be a valuable step forward. led to significant investment and there may therefore be a need to review policies for the development of a Infrastructure-sharing can also play an important backbone network. These could include providing firms role in improving networks and their coverage, with a conducive environment to invest in areas that especially in rural areas, as it lowers the risk and are commercially viable and providing access to well- costs of investing in network expansion. Nonetheless, designed subsidies to invest in areas where rollout is adequate competition safeguards for infrastructure- currently not commercially viable. On the latter point, sharing should be put in place to diminish competition subsidies available for infrastructure rollout under the risks, such as exchange of sensitive information between National Broadband Plan and the Universal Service competitors, or collusion at the retail level.128 The NCC Provision Fund could explicitly consider competitive could develop a framework for infrastructure-sharing neutrality principles, which would safeguard against (passive: mast, sites, cabinet, power, conditioning; and distortions from the advantages provided to subsidy active: spectrum), which balances the efficiencies and 125 National Broadband Plan 2020–2025. Available at: https://www.ncc.gov.ng/accessible/documents/880-nigerian-national-broadband- plan-2020-2025/file. 126 Reis, Jose Guilherme, Mariana Iootty, Jose E. Signoret, Tanja K. Goodwin, Martha M. Licetti, Alice Duhaut, and Somik V. Lall. 2018. “Trade Liberalization and Integration of Domestic Output Markets in Brazil.” Policy Research Working Paper 8600, World Bank, Washington, DC. 127 Sekkat, Khalid. 2009. “Does Competition Improve Productivity in Developing Countries?” Journal of Economic Policy Reform 12 (2): 145–62. 128 GSMA, Enabling Rural Coverage Regulatory and policy recommendations to foster mobile broadband coverage in developing countries (2018). 94 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE the anticompetitive effects that could emerge from such cutting off a potentially important source of competition agreements. This framework should consider: (i) the in the market. In 2017, the NCC published a request for degree of cooperation/autonomy between the parties to proposals for the development of a licensing framework the agreement, which is also a function of the passive or for MVNOs and a draft of a license framework for the active nature of the infrastructure; (ii) the parties’ market establishment of MVNOs has been produced by the power; (iii) the duration of the agreement; and (iv) the NCC.130 However, discussions on its implementation characteristics of the area covered in terms of scope and are ongoing131 and regulation on the matter is yet to density.129 be enacted (Vanguard, 2021). The implementation of MVNOs’ entry to the market can be achieved either by permitting voluntary agreements between operators Ì There is scope to further promote market or by obliging operators with significant market power contestability in broadband services through (SMP) to host MVNOs. Wholesale offers to MVNOs regulation of wholesale services must be transparent and non-discriminatory. This Market contestability in the retail supply of then requires that MNOs have accounting unbundling broadband services requires either access to between their infrastructure activities and services infrastructure or the ability to resell services (e.g., provision. In addition, a “margin squeeze”132 test that through mobile virtual network operators). Fiber can be easily controlled by the NCC and/or competition network providers that are identified as having a agency ex post should be put in place. dominant position should be subject to regulation of their wholesale services to ensure that third-party providers of broadband services (such as internet service Ì Regulation to improve efficiency in spectrum use providers) are able to interconnect with them on fair, in Nigeria can foster market entry and incentivize investments in network coverage and quality reasonable, and non-discriminatory terms. The NCC increases in mobile services has made moves to identify dominant operators in order to regulate access to their networks and this would be High spectrum charges and prices have been one of a positive step forward to allow for greater services the causes for delayed deployment of 4G133 networks, competition. In mobile telecommunications markets, affecting access to ICT services. A high burden from at the present time MVNOs are not allowed in Nigeria, spectrum license costs can affect operators’ investment 129 Some regulators have sought to increase rural coverage beyond what could be achieved in normal circumstances by allowing roaming and/or spectrum sharing in rural areas. France provides an interesting example. In the 800MHz (2011) and 700MHz (2015) auctions, the French regulator ARCEP attached a condition to the licenses mandating licensees to share spectrum when deploying services to a number of named highly rural areas. Operators were free to decide how they shared spectrum and the requirement was limited to the named areas that were included as part of the more general that coverage obligation. Mandatory sharing reduced the cost of rolling out networks in rural areas and enabled more stretching coverage obligations than otherwise. There was a risk that spectrum sharing could have led to increased cooperation between operators and reduced competitive intensity. However, the limited scope of the requirement mitigated these risks and there has been intense price competition in the French mobile market over the past five years. There are other examples of support for rural spectrum sharing to promote coverage. The Hungarian regulator approved a spectrum sharing agreement for 800MHz spectrum in 2015lv to promote rural coverage. The German regulator, BNetzA, proposed that operators voluntarily agree roaming in rural areas for 5G, in the context of the auction of 2 GHz and 3.6 GHz spectrum scheduled for 2019. 130 NCC. “First Draft Document. LICENSE FRAMEWORK FOR THE ESTABLISHMENT OF MOBILE VIRTUAL NETWORK OPERATORS IN NIGERIA”https://www.ncc.gov.ng/documents/941-draft-mvno-licence-framework/file. 131 https://technologytimes.ng/mvno-nigeria-open-for-new-mobile-operators/; https://www.lexology.com/library/detail.aspx?g=c0b274b5-2e23-42e2- 940f-f69bf168bb76 132 A “margin squeeze” takes place when a vertically integrated dominant company sets a relatively high price for its competitors to access an upstream input it controls, while setting a relatively low price for its own activities downstream. This pricing policy “squeezes the margins” of the dominant firm competitors, who are prevented from trading profitably downstream, and may ultimately lead to their exclusion from the downstream market where they compete with the dominant firm. 133 National Broadband Plan 2020–2025. Available at: https://www.ncc.gov.ng/accessible/documents/880-nigerian-national-broadband- plan-2020-2025/file; GSMA. 2017. Effective Spectrum Pricing: Supporting better quality and more affordable mobile services. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 95 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 in network, coverage and quality of the services offered. eight lots (80MHz in total) were left unused.135 The Globally, high spectrum prices are usually linked to FGN should look to balance the objective of raising lower upload and download speeds.134 In addition, high revenue with delivering greater consumer welfare in spectrum prices can leave spectrum unsold, which can spectrum auctions by designing tenders with reserve result in further scarcity. In 2016, high reservation prices prices that go according to market reality and not in Nigeria played a role in limiting bidder participation: exclusively to maximize revenues. Further considerations MTN was the only bidder to meet the reserve price in for the pro-competition management of spectrum in the 2.6GHz auction in six lots out of 14. The remaining Nigeria are outlined in BOX 5.1. BOX 5.1. Regulation to foster efficient use of Nigeria's spectrum can help increase competition and quality of service Access to spectrum and policies around its management are a key determinant of competition dynamics and efficiency in mobile services markets. Radio spectrum is an essential but scarce resource for the development of mobile telecommunications and the digital economy. In light of its scarcity, competitive spectrum auctions are crucial to ensure that spectrum is awarded to the operators that can create the highest value from it. However, if a careful market study confirms that competition in wireless markets would become more effective if preferential access is given to a smaller operator or a new entrant, the NCC could consider the adoption of auction conditions or ‘price concessions’ such as spectrum set-asides, caps, or band plans to encourage such an outcome. These are measures that hinder the aggregation of spectrum rights by incumbents to the benefit of newcomers or smaller players and have been used successfully in a number of other countries globally to encourage competition in mobile markets. Moreover, to ensure that spectrum continues to be efficiently used over time, it is important that telecommunications laws also allow for market- based mechanisms, such as spectrum trading. Spectrum trading can help prevent operators from hoarding or inefficiently using the spectrum they hold. While spectrum trading has been allowed in Nigeria since 2018, there appears to be no practice in this regard. This could be due to the high commissions and fees that have to be paid to the NCC (between 40 and 60 percent on net proceeds of the spectrum trading transaction plus an administrative fee of 1 percent of the gross proceeds of the transaction). In addition, spectrum trading is not allowed unless the seller has held the spectrum for a minimum of two years and has achieved at least 25 percent of the rollout obligation specified in the spectrum license. In the review process of the spectrum sharing guidelines that started at the end of 2020, the NCC has proposed to lower the holding time of spectrum to one year, but has maintained the 25 percent minimum rollout condition and has increased the commission for on net proceeds of the spectrum trading transaction to 70 percent. Where market-based mechanisms such as spectrum trading do not function well, it is important that regulators are equipped with adequate tools to tackle spectrum hoarding. Use-it-or-lose-it clauses could be used as a last resort to tackle hoarding (for example, where an operator acquires spectrum with the purpose of foreclosing competitors or with no real intention to use it for network deployment). While Nigerian legislation does establish use-it-or-lose-it conditions, these seem to not have been enforced in practice. There have been 134 GSMA. 2017. Effective Spectrum Pricing: Supporting better quality and more affordable mobile services. 135 GSMA. 2018. “Spectrum pricing in developing countries. Evidence to support better and more affordable mobile services”. Available at: https:// www.gsma.com/latinamerica/wp-content/uploads/2018/07/Spectrum-pricing-developing-countries.pdf. 96 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE Box 5.1 continued cases where spectrum might have been inefficiently used for a long time and where use-it-or-lose-it rules were not enforced. In 2013, Bitflux successfully bid for 30MHz of 2.3GHz spectrum. However, it took over four years to effectively start rolling-out its network and only in Lagos. This precluded other players from participating in the market and affected increases in service coverage. Overall, greater consistency of the framework governing spectrum rights (e.g., in terms of duration, renewal and attached conditions) can support a level playing field and investor certainty. In Nigeria there is heterogeneity with regards to the duration of spectrum rights, as this is decided on a case-by-case basis where the duration of the rights is set forth in each individual license. In addition, the conditions and terms for renewal are also set on a case-by-case basis. Lack of consistency in licensing conditions opens doors for differentiating among market players which can unlevel the playing field. It is also worth noting that no licenses for multiple technologies are awarded in Nigeria. Licensees receive a license only to operate a specific technology of mobile broadband provision. This goes against best practice of technology neutrality and can halt rapid efficient technological updates and innovation (from 3G to 4G to 5G). Ì An independent regulator that works together required to ensure remedies are adequately designed.136 with the competition authority can help mitigate In addition, the NCC does not have clear rules competition risks in the ICT sector governing the periodicity of relevant market analysis,137 Telecommunications markets feature industry which can therefore result in the regulation of markets characteristics that make the sector more prone to based on outdated data, and in the under-regulation of market concentration and potential anticompetitive operators that are active in markets that have not been practices. For this reason, it is important to have a assessed yet. strong ex ante regulatory framework in place that promotes facilities and services-based competition, as The memorandum of understanding (MoU)138 well as an effective competition law enforcement both ex that has been signed between the FCCPC and the ante (through merger control), and ex post (prohibiting NCC in relation to consumer protection should be abuses of dominance and anticompetitive agreements). expanded to collaboration to ensure competition in To deal with possible anticompetitive issues derived from telecommunications markets to better address any market concentration, the NCC caries out assessments competition issues. The FCCPC is currently in the of SMP in the telecommunications markets and can process of developing such an MoU with the NCC. impose remedies. Nevertheless, further capacity may be Collaboration between the two institutions should look 136 For example, when NCC determined that Globalcom and MTN had joint dominance in the upstream segment of mobile markets, the regulator imposed price caps for wholesale services and a price floor for retail services. Imposing minimum retail prices for data services raises prices for consumers. (Streamsowers & Köhn - Chukwuyere E Izuogu, Otome Okolo and Tamuno Atekebo, “In brief: telecoms regulation in Nigeria”. Available at: https://www.lexology.com/library/detail.aspx?g=38c795ed-1569-48a7-be94-d73f5c047d1c). On the other hand, some positive remedies have been imposed. For example, when NCC determined that MTN held SMP for the mobile voice segment it imposed obligations on MTN in terms of accounting separation between levels in its vertical structure, collapse of on-net and off-net retail tariff, and a determination of the pricing principle to address the rates charged for on-net and off-net calls for all operators in the mobile voice market. These remedies were in line with an objective of maintaining competition in the market. 137 In 2020, the NCC imposed mandatory accounting separation obligation on Airtel, EMTS, Globalcom, MTN (MNOs); Mainone Cable (submarine cable operator); and IHS (infrastructure sharing provider). This determination did not define any market. NCC seems to be looking to identify and prevent discrimination or other practices that lessen competition such as cross-subsidization and margin squeezes, by imposing the accounting separation. 138 https://www.fccpc.gov.ng/about/alliances/. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 97 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 to allow them to share information, best practices, staff, is likely to dampen competition from non-traditional conduct research and organize joint advocacy efforts. It financial players and could limit innovation. In will also be important that the competition authority addition, the level playing field would be affected if only analyzes regulatory proposals or remedies in the one MNO is licensed as a payment service provider. telecommunications sector to provide recommendations Clarification on licensing types, which entities are to make these more pro-competitive. allowed to obtain them, and what kinds of services can be provided with them will be fundamental to foster Independence safeguards for the NCC could be market entry, service quality and, importantly, financial strengthened further to ensure consistent and inclusion through innovation in Nigeria. independent implementation of the regulatory framework. The NCC today is still dependent of To open the market for digital financial services the executive branch of government in Nigeria. For further, challenges for third parties accessing MNOs’ example, the President designates the Commission’s Unstructured Supplementary Service Data (USSD)/ Board members and annual budget requirements must SMS channels to make bank transactions for digital go through the President before being reviewed by the financial services would need to be addressed. These National Assembly.139 challenges include: • Third parties claim that current MNO pricing of 5.3.2  Regulatory issues for competition their USSD/SMS channels leads to margin squeeze. in digital services: the example of digital • MNOs will not commit to quality of service, which is financial services problematic since MNOs bill for failed transactions. • MNOs can access the data of third-party providers Ì Digital financial services is a sector in which since USSD is transferred in clear text. pro-competition regulations are required to boost • While MTN is now subject to regulation from the competition in Nigeria. CBN to provide access to its USSD/SMS channels Until recently in Nigeria, regulatory issues blocked to third parties on non-discriminatory terms, telecom companies from fully operating financial enforcement of the provision has not yet been seen. services, which limited innovation and competition in the banking market. In 2019, after a 2018 reform, Nigeria has published a framework for Open Banking MTN, the largest telecommunications operator in that will give access on customer transaction data Nigeria, was given a license to operate as a payment to third parties, which can pave the way for fintech service banking provider allowing it to compete firms and non-financial sector players to create directly with banks (Techcabal, 2019). This is positive innovative financial products. Currently, fintech firms given that the CBN previously required MNOs to such as Paga and OPay are reaching unattended sectors provide mobile money only in partnership with banks. of Nigeria’s population with an offering of payment Nevertheless, in 2021, the CBN issued a new regulatory services through agent banking networks. Nevertheless, regime for Mobile Money Services, which explicitly they need to undergo several different integrations with excludes MNOs. Only banks and non-banks, excluding Nigerian traditional banks before launching at agent subsidiaries of a telecommunications company, are locations. This delays their entry to markets. To alleviate authorized to act as Mobile Money Operators.140 This these issues and promote innovation, in February 2021 139 Nigerian Communications Act, 2003. Available at: https://ncc.gov.ng/accessible/documents/128-nigerian-communications-act-2003/file. 140 CBN. “Regulatory Framework for Mobile Money Services in Nigeria”. Available at: https://www.cbn.gov.ng/out/2015/bpsd/regulatory%20 framework%20for%20mobile%20money%20services%20in%20nigeria.pdf. 98 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE the CBN published a regulatory framework for Open as a regulatory sandbox for fintech firms operating or Banking.141 The objective of these regulations is to create seeking to operate in the Nigerian capital market.144 a common standard for fintech firms, traditional banks The NCC has also announced its intention to and non-financial players looking to enter the market introduce sandboxes for innovative business models to share data between themselves through an Open and services in the digital economy (Techpoint, Application Program Interface with a common standard 2020). to which all players have access. It will be important that the standard and the following implementation of Open Banking in Nigeria is done under non-discriminatory conditions. Finally, the CBN has published a framework for regulatory sandbox operations in the financial sector aimed at fostering new and more flexible ways of engaging with the financial industry.142 A regulatory sandbox allows firms to perform tests of new, innovative products, services, or business models in a controlled environment, with CBN regulatory oversight, subject to appropriate conditions and safeguards. This would help fintech firms and other non-banking players to develop and introduce new products in the Nigerian market even when they do not fall under one of the categories established in the current regulations and licenses. Nevertheless, the current framework should be clarified further with additional guidelines and regulations. It will be especially important to:143 • Provide clear incentives for fintech firms to participate in the sandbox. The current framework does not specify if successful sandbox participants will be fast tracked in the granting of an approval or license to provide services. • Ensure coordination with other regulators to reduce regulatory conflicts for sandbox participants. In June 2021, the Securities and Exchange Commission (SEC) launched a circular on its Regulatory Incubation Program, which will work 141 https://www.cbn.gov.ng/Out/2021/PSMD/Circular%20on%20the%20Regulatory%20Framework%20on%20Open%20Banking%20in%20 Nigeria.pdf. 142 https://www.cbn.gov.ng/out/2021/ccd/framework%20for%20regulatory%20sandbox%20operations.pdf. 143 Pavestones, “FinTech regulatory update – the Central Bank of Nigeria regulatory sandbox”. Available at: https://pavestoneslegal.com/FinTech- regulatory-update-the-central-bank-of-nigeria-regulatory-sandbox/. 144 SEC. Circular on the SEC Regulatory Incubation Program. Available at: https://sec.gov.ng/circular-on-the-sec-regulatory-incubation-program/. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 99 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Nigeria’s positive steps and remaining gaps in establishing a holistic competition policy framework Opening markets through pro- Competitive neutrality and Ensuring effective competition competition sector regulation promoting a level playing field law enforcement (Example of ICT and digital financial services) ICT • Privatization of SOEs in the • Enactment of the FCCPA and • Provisions for spectrum trading past and plans to continue with establishment of FCCPC. are in place. them. • Good overall level of • Use-it-or-lose-it clauses in independence of FCCPC, place. especially internally. Positive Steps • NCC caries out assessments of Significant Market Power (SMP) in the telecommunications markets and can impose remedies. Digital financial services • Initiation of an Open Banking framework. • Regulatory sandbox for fintech. ICT • Protectionist stance in industrial • Thresholds for merger review • MVNOs are not allowed in policy: could lead to overenforcement mobile markets. Ì Local content rules in several and undue burden on the sectors. FCCPC. • Lack of consistency in licensing conditions in Ì Import bans, quotas, and • Provisions of price regulation telecommunications sector. high effective duty rates on and exemptions in the FCCPA imports. go against good practice. • Lack of infrastructure sharing framework. Ì Restrictions to foreign • Guidelines and secondary Examples of remaining gaps companies entering the regulation still pending. • Reserve prices in spectrum auctions are too high and are market. • Space to increase external not set according to the market. • Large, dominant players independence of the FCCPC. • Spectrum trading inhibited exercise significant influence on • Room of improvement in by high commissions and the design of industrial policy capacity and efficiency of minimum holding times of and regulation. FCCPC processes spectrum. • State aid benefitting connected • Carve out of specific sectors • No enforcement of use-it-or- large players. from the competition law can lose-it clauses for spectrum • Privatization and PPPs lack risk lack of sound enforcement holding. considerations of impacts on of competition rules. • Granting of Right of Way is not competition and could be more • Space to increase transparent nor standardized. transparent. independence of other regulators such as NCC. Digital financial services • No clear incentives to participate in fintech sandbox. • Possible overlap with sandboxes from other regulators. 100 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options What Impact These Why Reforms Are Needed Which Reforms Are Critical Reforms Could Have Economy-wide policy to increase competition and enhance performance of Nigerian markets. • Recent enacting of • Address gaps in competition law framework (Who: • Reduce competition law and FCCPC): overenforcement and establishment of Ì Increase merger thresholds, change to a “combined undue burdens on the competition authority and individual threshold” and include special FCCPC and give it but there is some provisions to define thresholds in terms of assets for the ability to deal with way to go to ensure mergers in nascent markets. mergers that have a solid regulatory the highest degree framework on Ì Finalize key secondary regulations and guidance of potential harm to competition policy such as market definition guidelines. competition. enforcement. Ì Enact leniency policy regulations and provide • Increase the guidelines. predictability and • Develop collaboration agreements and guidelines on clarity of the framework how FCCP will work with sector regulators on ex-post for competition competition matters. (Who: FCCPC) enforcement in • Remove provisions for price regulations and Nigeria giving higher exemptions for professional services in the certainty to firms and Competition Act. (Who: National Assembly/FCCPC) deter anticompetitive • Ensure CBN is well-capacitated in competition issues. behavior. Otherwise, reassess exemptions of the applicability of • Reduce potential the FCCPA to the financial sector. (Who: CBN) unnecessary distortions to the markets. • Need to build the • Guarantee FCCPC internal and external independence • FCCPC can make regulation, tools, and (Who: National Assembly/FCCPC): sound technical capacity required to Ì Give the FCCPC complete budgetary independence. decisions independent tackle anticompetitive of any bias arising from firm conduct, prevent Ì Executive brand of government should not intervene undue influence from anticompetitive in investigations. external parties (both mergers, and Ì Adjudicator should not be financed by the sanctions public and private) and advocate for pro- it imposes. internal conflicts of competition policies. Ì Fixed terms and cooling-off periods for adjudicators interest. and prosecutors should be implemented. • Improve the FCCPC’s • Increase efficiency of the FCCPC (Who: FCCPC) efficiency, reduce its Ì Increase human resources with specialization in burden and increase investigation and prosecution of anticompetitive its capacity to handle a practices and merger reviews. larger number of cases. Ì Implement independent budget allocation for its various mandates. Ì Introduce screening practices for complexity in anticompetitive practice cases. Ì Give the FCCPC the legal capacity to introduce remedies. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 101 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (continued) What Impact These Why Reforms Are Needed Which Reforms Are Critical Reforms Could Have • Industrial policies • Reduce or eliminate local content requirements in • Create level playing have introduced markets in Nigeria. fields between competition • Revise and reduce as much as possible import bans, domestic and foreign distortions to markets quotas, and effective duty rates on imports. firms, incentivize due to protectionism investment, and reduce and influence of large • Remove restrictions on foreign companies entering the prices for households players. market without first incorporating in Nigeria. and downstream firms • Reduce influence of largest market players in industrial through competition. policy decisions. • Make state aid to firms available to all players in the markets without benefitting certain players over others. • Publish transparent, objective eligibility criteria for incentive schemes (including the Pioneer Status Incentive) and increase transparency in administration and results. • Reduce or eliminate preferences for Nigerian firms in government procurement. • Privatization and • Consider impacts on competition of privatization and • Privatization and PPPs have not PPPs. PPP frameworks been conducted Ì Design privatization schemes carefully to ensure to be conducive with consideration competition in selecting a buyer. to competitive and of the impacts on transparent procedures competition in Ì Complement privatization process with parallel that do not affect level Nigerian markets. regulatory efforts to improve the level playing field. playing field of markets. Ì Enact a unified PPP Law and eliminate overlaps with sectoral laws. Ì Conduct market assessments prior to tendering to ensure that tender qualification criteria and procedures are correctly set to competition. Ì Enhance transparency of PPPs processes by publishing tender documents and contracts awarded. Ì Introduce a sound framework for limits on renegotiation of PPP contracts. 102 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (continued) What Impact These Why Reforms Are Needed Which Reforms Are Critical Reforms Could Have Nigeria would benefit from a pro-competition framework and regulation for broadband roll out. • Nigeria’s fixed • Consider the effects on competition when awarding • Increase broadband broadband licensing and subsidies looking to increase the roll out roll out without penetration is of fiber. unnecessarily affecting relatively low. Need Ì Review policies for the development of a backbone competition in markets. to improve both network, including providing firms with a conducive • Give investors certainty backbone and last environment to invest in areas that are commercially in their venture to lay mile fiber networks. viable. fiber throughout the Ì Avoid giving zonal licenses for roll out of fiber that country and incentivize create monopolies/bottlenecks in areas where roll competition to reach out is commercially viable and competition could underserved zones. exist. Ì Explicitly consider competitive neutrality principles in the assignment of subsidies for roll out under the National Broadband Plan and the Universal Service Provision Fund. • Develop a framework for infrastructure sharing which balances the efficiencies and the anticompetitive effects that could emerge from such agreements. • Formally enact transparent and standardized Right of Way legislation. • Ensure sound regulation of wholesale networks of dominant network providers to ensure that third party service providers are able to interconnect with them on fair, reasonable, and non-discriminatory terms. Who: NCC • Scope to boost • Promote market contestability and infrastructure • Promote market entry, mobile market sharing in Nigeria’s mobile telecommunications sector. infrastructure sharing contestability, Ì Develop a framework for infrastructure sharing. and an efficient use address the low of spectrum, for the rollout of 4G Ì Allow entry of MVNOs to the market. development of ICT technology, and Ì Design spectrum tenders with reserve prices that are sectors and digital reduce prices of set according to market reality. economy markets. mobile services. • Make spectrum licensing conditions consistent and • Increase competition, avoid establishing them on a case-by-case basis. quality of service • Review spectrum trading regulations to increase its and can catalyze adoption. productivity • Enforce use-it-or-lose-it clauses when spectrum and economic hoarding is detected. development. • Consider the adoption of ‘price concessions’ such as spectrum set-asides, caps, or band plans. • Avoid imposing additional distortions to the markets such as minimum retail prices. Who: NCC Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 103 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (continued) What Impact These Why Reforms Are Needed Which Reforms Are Critical Reforms Could Have • Telecommunications • Strengthen regulatory and enforcement capacity of the • Mitigate competition markets feature NCC risks in the ICT sector. industry Ì Establish clear rules governing the periodicity of characteristics that relevant market analysis (Who: NCC) make the sector more prone to Ì Strengthen collaboration between the NCC and the market concentration FCCPC allowing them to share information, best and potential practices, staff, conduct research and organize joint anticompetitive advocacy efforts. (Who: NCC/FCCPC) practices. Ì Implement independence safeguards for the NCC. (Who: National Assembly/NCC) Developing competitive digital financial services in Nigeria • Need to promote • Clarify licensing types, who is allowed to obtain them, • Smooth market entry of more and what kinds of services can be provided with them. entries and increase players into the • Allow licensing to any eligible player and not unlevel competition, service FinTech sector and playing field by favoring certain firms over others in quality and, importantly, allow for regulatory obtaining licenses. financial inclusion flexibility to promote through innovation. innovation. • Develop a common standard for an Application Program Interface for Open Banking and implement Open Banking under non-discriminatory conditions • Provide clarity on incentives for FinTech firms to participate in regulatory sandbox. • Provide access to sandbox under no discriminatory conditions. • Avoid duplicities and overlapping in regulatory sandboxes in fintech. 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African Affairs 119(474): 1–38. Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities 107 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Annex 5.1 TABLE 5.2. Price comparisons analysis: Lagos, Nigeria vs. cities in all other countries (1) (2) (3) (4) (5) (6) (7) (8) -0.100*** 0.156*** 0.168*** 0.174*** 0.158*** 0.157** 0.181*** 0.143** Nigeria (0.030) (0.053) (0.050) (0.051) (0.054) (0.060) (0.052) (0.058) Log of GDP per capita 0.160*** 0.138*** 0.134*** 0.124*** 0.125*** 0.048 0.026 PPP (2011 international (0.026) (0.030) (0.031) (0.032) (0.030) (0.042) (0.046) $) -0.118** -0.117** -0.102* -0.099* Log of cost of import (0.053) (0.055) (0.056) (0.055) -0.002 -0.005 -0.005 -0.003 -0.004 Tariff rate, applied (0.007) (0.007) (0.007) (0.006) (0.006) 0.005* 0.002 Corporate tax rate (%) (0.003) (0.002) Indirect tax rate -0.002 -0.004 (standard, %) (0.003) (0.003) Log of Aggregated LPI 0.701*** 0.793*** score (0.227) (0.220) No. of observations 75427 75427 75427 74868 68014 68014 68014 68014 R-squared 0.802 0.818 0.820 0.820 0.822 0.821 0.824 0.825 Product fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Notes: Results are from an OLS regression using 2010–20 data from the Economist Intelligence Unit (EIU). The dependent variable is the logarithm of market prices (current international $/kg) of the following products: Apples (1 kg), Bananas (1 kg), Beef (fillet, ground, roast, 1 kg), Butter(500g), Carrots (1 kg), Chicken (fresh, frozen 1 kg), Cornflakes (375g), Eggs (12), Flour white (1 kg), Fresh fish (1 kg), Lettuce (1 head), Milk (pasteurized, 1 litre), Mineral water (1 litre), Mushrooms (1 kg), Onions (1 kg), Oranges (1 kg), Peanut Oil (1 litre), Potatoes (2 kg), Spaghetti (1 kg), Sugar white (1 kg), Tomatoes (1 kg), Tonic water (200 ml), White bread (1 kg), White rice (1 kg) and Yoghurt (150g). Results shown use exchange rates provided by the Economist Intelligence Unit. The results are robust to using exchange rates from the World Bank WDIs). The variables GDP, tariff, and logistics performance are from the World Bank’s World Development Indicators (WDI), cost of import is from the Trading Across Border dataset, aggregated LPI is from https://lpi.worldbank.org/, and corporate and standard indirect tax rates are from KPMG, Deloitte, and other web sources. Standard errors clustered at the country level are in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. The sample includes 97 cities from the following 89 countries: Algeria, Argentina, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belgium, Brazil, Brunei Darussalam, Bulgaria, Cameroon, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Cote d’Ivoire, Denmark, Ecuador, Egypt, Arab Rep., Finland, France, Germany, Greece, Guatemala, Hong Kong SAR, China, Hungary, Iceland, India, Indonesia, Iran, Islamic Rep., Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, the Rep. of Korea, Kuwait, Libya, Luxembourg, Malaysia, Mexico, Morocco, Nepal, the Netherlands, New Caledonia, New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, the Philippines, Poland, Portugal, Qatar, Romania, the Russian Federation, Saudi Arabia, Senegal, Serbia, Singapore, the Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, the Syrian Arab Republic, Taiwan, China, Thailand, Tunisia, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uruguay, Uzbekistan, Vietnam, Zambia, and Zimbabwe. For robustness, a parallel analysis was performed using Numbeo price data for a similar list of products in Nigeria, obtaining similar results. 108 Note 5: Strengthening Competition in Nigeria to Unlock Growth Opportunities Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 Authors: Christina Jenq, Jonathan Lain, and Tara Vishwanath NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19131 Summary human capital stock, notably through declines in educational attainment. Continued underinvestment • The COVID-19 crisis has underlined weaknesses in in human capital may keep Nigeria from harnessing Nigeria’s labor market, but the country can leverage the economic potential of its young population the crisis to protect human capital and foster good through two main channels: by weakening workforce jobs for its young population. productivity and slowing any fertility transition. • Before the COVID-19 pandemic, Nigeria’s youth • Evidence in this brief supports three directions for already faced a daunting jobs challenge: even without policy action to deliver good jobs and prepare young the pandemic, about 30.8 million Nigerian youth Nigerians to fill them: invest in human capital; boost aged 15–29 (about 54.3 percent of the 56.7 million job creation; and help enterprises grow. people in that age group) were projected to have • Reversing education losses from the COVID-19 entered the labor market in 2021. pandemic, particularly among girls, is a top priority. • Widespread informality and precarity in Nigeria’s Options include adding more hours to the school day, labor market had not improved in the decade before repeating the missed school period, and delivering the COVID-19 crisis. From 2010 to 2019, the share lessons during school holidays. Monitoring education of working-age Nigerians with jobs in household results is vital to ensure that losses are recouped. agriculture increased from 25.6 to 35.9 percent. • Priorities to support job creation include promoting Precarious jobs offer less reliable pathways out of economic diversification away from oil and poverty. redirecting public spending toward productivity- • To inform a new generation of labor-market policies, enhancing infrastructure and pro-poor social this brief provides evidence on how Nigeria’s youth protection. have responded to two recent economic shocks: the • Policies that loosen enterprise credit constraints and 2016 oil-price recession and the ongoing COVID-19 develop infrastructure can boost firms’ productivity, crisis. profits, and job creation. For example, cash grants • Youth responded to both crises by leaving school administered through a national business competition earlier to enter the labor market, thus increasing have shown large positive effects on firms’ survival, overall labor supply. Rising labor supply amid profitability, and hiring. chronic job shortages has further widened precarity • Nigeria’s young population embodies the nation’s and informality in Nigeria’s labor market. promise. Ensuring good jobs for youth will enable • Compared with the 2016 oil-price recession, the the country to seize its demographic dividend. This COVID-19 pandemic’s negative labor-market effects is vital to drive future inclusive growth and poverty are more concentrated among women and the poor. reduction. • Two economic crises in close succession have diminished—and are still diminishing—Nigeria’s 145 We are grateful to Maria Eugenia Genoni (Senior Economist, Poverty and Equity Global Practice, Middle East and North Africa region) and David McKenzie (Lead Economist, Development Economics and Chief Economist, Development Research Group) who reviewed an earlier draft of this report and provided extremely useful comments. We are also indebted to Alexander Irwin for his very helpful editorial suggestions. 110 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE Recent crises have threatened the welfare and these two surveys to assess how Nigerian workers fared livelihoods of households across Nigeria. Against a during two shocks that occurred in close succession— backdrop of ongoing conflict and climate shocks, the the oil-price recession and the COVID-19 crisis—how Nigerian economy was hit hard by the oil-price recession these shocks differed in their labor-market impacts, and in 2016 and the ongoing COVID-19 crisis. The labor what this means for future policy. market is the main vehicle through which these large economic shocks affect households and individuals. It Given Nigeria’s large and growing youth population, is also the main vehicle through which poverty can be this note pays particular attention to young people. alleviated. Therefore, understanding the make-up of the Exploiting the country’s “demographic dividend” will be Nigerian labor market—and how it responded during vital for fostering inclusive growth and driving poverty these crises—is crucial for policy makers. reduction. This technical note combines insights from two main sources to analyze labor market dynamics and 6.1  A job-market crisis before the crisis identify policy solutions during this critical juncture for Nigeria. These are Nigeria’s General Household Even before the COVID-19 pandemic, ensuring that Survey (GHS), collected four times between 2010 there were enough jobs146 for Nigeria’s youth was and 2019, and the monthly Nigeria COVID-19 already an urgent concern. Assuming that the share of National Longitudinal Phone Survey (NLPS), collected young people working remained the same as just before throughout the COVID-19 crisis. The surveys are the COVID-19 crisis, about 30.8 million Nigerian described in BOX 6.1. This note analyzes data from youth aged 15–29147 were projected to need jobs in BOX 6.1. Data sources  hile several surveys collect data on labor-market outcomes in Nigeria, this policy brief primarily relies on the W Nigeria General Household Survey-Panel (GHS) and the COVID-19 National Longitudinal Phone Survey (NLPS).  wo main reasons explain this choice. First, the GHS was implemented four times during the period T 2010–19, which straddles the 2016 oil-price recession, and contains modules suitable for analyzing labor- market dynamics. The panel (longitudinal) nature of the sample also allows rigorous analysis of labor market transitions. Second, the households surveyed in the NLPS are a subset of the GHS households, so that data at the household and individual levels from the GHS and NLPS can be linked longitudinally. With the ability to link individuals across data sources, this brief can analyze changes in labor-market outcomes before and during the COVID-19 crisis for the same set of households and individuals. More information on the GHS and NLPS is provided in Annex 6.1.  ther data sources, such as Nigeria’s labor force survey, do not collect their data in a continuous or regular O manner, making it difficult to consider changes over time, especially given the extent of seasonality in agricultural activities. 146 Key definitions, including what counts as a job, are taken from World Bank (2015) and outlined in Annex 6.1. 147 In this brief, unless otherwise specified, the terms “youth” and “young people” refers to those aged 15–29 years. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 111 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 2021.148 If anything, the scale of the jobs challenge 6.1.1  Nigeria’s young demographics could be even larger following the COVID-19 crisis: as Section 6.3 demonstrates, economic crises can lead The sheer scale of Nigeria’s youth jobs challenge is a larger share of young Nigerians seeking work rather a natural consequence of the country’s very young than remaining in school. Absent any reforms or large population structure. Over two-thirds of Nigerians structural changes—and thus assuming that the shares are under the age of 30 (FIGURE 6.1). Moreover, of young people engaged in different jobs also remained this young population structure has remained largely the same—around 15.1 million youth (about half ) unchanged since at least 2000 and is projected to persist would be engaged in household agriculture and about through 2030 with even greater absolute population size. 9.9 million would be engaged in non-farm household As the absolute population size has increased while the enterprises, with just 3.0 million holding wage jobs.149 age structure has remained unchanged, greater numbers By 2030, the estimated number of youth needing jobs of youth are entering the labor market compared with will increase to 40.2 million, with 19.7 million engaging previous decades.150 The mechanical rise in the number in household agriculture, 13.0 million engaging in of young jobseekers will continue if the share of youth non-farm household enterprises, and only 3.9 million seeking work does not change. holding wage jobs. Young people comprise a large share of the population across SSA, but the size and persistence of Nigeria’s youth bulge sets it apart from other countries. Young people make up a much larger share of the working- age151 population in SSA as a whole compared with FIGURE 6.1. A “youth bulge” that is not going away Nigeria population estimates, 2000–30 Millions of people 45 40 35 30 25 20 15 10 5 0 4 9 4 9 4 9 4 9 4 9 4 9 4 9 4 9 + 0– 5– –1 –1 –2 –2 –3 –3 –4 –4 –5 –5 –6 –6 –7 –7 80 10 15 20 25 30 35 40 45 50 55 60 65 70 75 Age group, years J 2000 J 2010 J 2021 J 2022 Source: World Bank DataBank (for population estimates and projections) and World Bank estimates. 148 These calculations take the projected population estimates from the World Bank DataBank—which suggest there were around 56.7 million 15–29-year-olds in Nigeria in 2021, and the shares of 15–29-year-olds who are working and engaged in different types of jobs according to the 2018/19 GHS (FIGURE 6.3). It is assumed that the shares of young people working and engaged in different types of jobs remain the same while the population increases. 149 The number of young people projected to work as trainees or apprentices is not reported. 150 Alternative data from the U.S. Census International Database, reported in FIGURE 6.3 in Annex 6.3, suggest that about 7 in 10 Nigerians are under age 30 and that the country’s population structure has remained largely unchanged since 2000, in line, with World Bank DataBank’s estimates. Using those population numbers gives an estimate of 33.2 million youth aged 15–29 needing jobs in 2021. 151 Working age encompasses people aged 15 to 64 years old. 112 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE any other region in the world (Fox and Gandhi, 2021). 6.2.1  Many people working – but not in However, this masks important variations within good jobs SSA. Given declining fertility rates, the youth share of the working-age population has already peaked Before the COVID-19 crisis, more than two-thirds and is steadily dropping in key regional comparators of Nigeria’s working-age population was working. such as Ethiopia, Ghana, and Kenya. Thus, with the Averaged across the two agricultural seasons,152 about share of young people in the population projected 69.6 percent of the working-age population was to remain fairly constant in Nigeria (as FIGURE 6.1 working in 2018/19 (FIGURE 6.2) This relatively high demonstrates), the country’s demographic challenge is participation rate reflects the prevalence of subsistence starker than many of its neighbors. work in agriculture or non-farm enterprises, combined with the fact that most people lack access to private The ongoing COVID-19 crisis could intensify this or public safety nets and therefore cannot afford to be jobs challenge, as these estimates of job shortages unemployed. This is consistent with evidence from across most likely represent a lower bound. This note SSA (Fox and Gandhi, 2021). However, there were some provides evidence that youth increase their rates of important differences across different segments of the working in response to negative economic shocks. This, population. Unsurprisingly, working rates were lower in turn, would further increase the number of young among youth; many young people had not transitioned Nigerians seeking jobs. fully from school to work. The share of people working also had an inverted-U-shaped relationship with education, being higher among those with primary 6.2  A long-standing pattern of informal education than both those with less than primary and precarious work education and those with at least secondary education. Finally, the share of men who were working—about Most jobs in Nigeria are informal and precarious, and 75.8 percent—was significantly higher than the share do not allow individuals to make enough income to of women who were working—about 63.7 percent. rise above and stay out of poverty. Indeed, even before Notwithstanding these differences, looking at working the COVID-19 crisis, about four in 10 Nigerians lived rates alone does not give adequate information on below the national poverty line, and a further one in the state of the labor market. Additional data, such as four were vulnerable to falling into poverty (World job characteristics and hours worked, provide crucial Bank, 2020). This section provides descriptive evidence evidence on whether jobs are precarious or productive— on Nigeria’s labor market prior to the COVID-19 crisis, that is, whether they afford an opportunity to lift people which emphasizes the informal and precarious nature out of poverty. of most people’s jobs and the longstanding nature of this challenge. BOX 6.2 explains how this section Pre-COVID-19 data on job types show that most follows the International Labour Organization (ILO) Nigerian workers were engaged in farm or non- definitions of informality and precarity, describing how farm household enterprises. Some 57.4 percent of these characteristics can be measured using the GHS and working-age Nigerians were primarily engaged in non- NLPS data available for Nigeria. farm household enterprises or household agriculture in 2018/19 (FIGURE 6.3). As these types of jobs are 152 Since agriculture plays a large role in the Nigerian labor market and is highly seasonal, GHS data were collected during two agricultural seasons for each of the survey’s four waves. One set of data is gathered during the “post-planting” period, roughly July–September, and one during the “post- harvest” period, roughly January–February of the next calendar year. To simplify the analysis, this brief will typically average labor market outcomes of the post-planting and post-harvest visits for each wave. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 113 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 BOX 6.2. Defining precarious work in Nigeria The International Labour Organization (ILO) defines precarious work as possessing the following characteristics:  (i) low paid, especially if associated with earnings that are at or below the poverty level and volatile; (ii) insecure, with uncertainty regarding the number of hours of work available, or regarding the continuity of employment, or regarding the risk of job loss; (iii) minimal worker control, such that the worker, either individually or collectively, has no say about their working conditions, wages, or the pace of work; and (iv) unprotected, meaning that the work is not protected by law or collective agreements with respect to occupational safety and health, social protection, discrimination, or other rights normally provided to workers in an employment relationship (ILO, 2016). Another way to describe a precarious work situation is one in which a worker bears the risks associated with the job, rather than the enterprise or firm that is hiring the worker. In the Nigerian context, this definition of precarious work has significant overlap with informal work; household enterprises are typically informal, and the work is thus unprotected by law or collective agreements. Annex 6.1 discusses the definition of informal work in Nigeria in more detail. The main proxies of precarity used in this brief—which are all available in the GHS and NLPS—are: job type, job sector, and hours worked.  e major job types measured in the GHS and NLPS include work in household agriculture, work Job type: Th in household non-farm enterprises, work as a trainee or apprentice, and wage work. Household agriculture and non-farm household enterprises may be more precarious, as they are small scale and unprotected. A range of evidence on agriculture in Nigeria suggests that farms are not commercialized or well linked to markets and access to key inputs may be constrained (Oseni and Winters 2009, FAO 2018, Ecker and Hatzenbuehler 2021). In contrast, wage employment jobs tend to offer lower earnings risk, even if they have informal contractual arrangements, and at least potential opportunities for better working conditions, such as paid overtime, paid leave, and social insurance (Fox and Gandhi 2021). Wage jobs may also provide the foundations for careers requiring a longer-term commitment to the labor market and offering advancement opportunities (Goldin 2006). Job sector: Information on job sector may also help characterize precariousness. For example, seasonality can render agricultural incomes insecure, while non-farm enterprises engaged in retail and trading—or commerce—may be more likely to be small scale with their owners bearing the risks associated with their business activities. Hours worked: W  ork that is insecure, volatile, and unprotected—common in household agriculture and non-farm household enterprises—often does not provide enough hours of work to enable the worker to earn enough income. Direct evidence on productivity and earnings, which can be compared across different job types and sectors, is not available in the GHS or NLPS. However, it is possible to verify which job types and sectors are associated with lower household consumption, and hence a greater chance of being in poverty. Jobs offering less opportunity to escape poverty are likely to be more precarious. 114 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE typically small scale, unprotected, and potentially subject enterprise jobs. Whereas 9.8 percent of the working-age to seasonality, they may be more precarious (BOX 6.2). population (14.1 percent of those who were working) Just 9.8 percent of the working-age population was engaged in wage work, just 5.3 percent of the youth engaged in wage work. This mirrors evidence from across population (9.7 percent of those who were working) SSA: while wage work may offer greater income security, were engaged in wage work in 2018/19 (FIGURE 6.3) in-work benefits, and potentially opportunities for On average, working youth were also over-represented building a more long-term and stable career, it remains in household agriculture and were less likely than the rare across the region (Fox and Gandhi, 2021). full working-age population to engage in non-farm household enterprises. Nonetheless, this masks important There were important differences in job types across gender differences among young people. Working youth’s gender and education levels. Men were more likely to overrepresentation in household agriculture was mainly be working in household agriculture and wage work, driven by young men: 56.1 percent of young men who while women were more likely to be engaged in non- were working were engaged in household agriculture, farm household enterprises in 2018/19 (FIGURE 6.3). compared with 39.9 percent of young women who were In addition, less-educated Nigerians were more likely to working. Conversely, young women who were working work in household agriculture or non-farm household were about as likely as the full working-age population to enterprises, while more educated Nigerians were far engage in non-farm household enterprises: 40.8 percent more likely to be doing wage work. of young women who were working were in non-farm household enterprises compared with 25.5 percent of Young people were especially likely to engage in young men who were working (and 39.0 percent of all household agriculture and non-farm household workers). FIGURE 6.2. High working rates before the FIGURE 6.3. High prevalence of work in household COVID-19 crisis farms and non-farm household enterprises across population groups Share of people working in different population groups, Primary job type in different population groups, 2018/19 2018/19 Percent Percent 90 100 80 90 24.2 24.1 22.9 81.4 30.4 77.2 80 36.3 75.8 45.7 70 72.4 3.7 0.9 69.6 70 12.9 9.8 23.4 60 63.7 60 2.6 6.9 2.4 2.2 33.3 54.3 5.3 2.7 50 50 5.0 24.1 27.1 40 40 30.0 17.5 30.4 30 30 20 36.2 38.0 30.3 26.6 20 24.7 20.7 10 10 0 15–64 15–29 Men Women Less than Secondary secondary or higher 0 By educational 15–64 15–29 Men Women None or less than primary Primary Secondary or higher All By sex (age 15–64) attainment (age 20–64) J All J By sex (age 15–64) J By educational attainment J Household agriculture J Non-farm ecterprise J Trainee J Wage work J Not working Source: 2018/19 GHS and World Bank estimates. Source: 2018/19 GHS and World Bank estimates. Notes: Estimates averaged across post-planting and post-harvest visits. Notes: Estimates focus on primary job, defined as the job in which the Sample for this figure (and all figures with only 2018/19 data) is limited to individual worked the most hours. Estimates averaged across post-planting those in the specified age range with non-missing information on sex, age, and post-harvest visits. Education sub-groups focus on cohorts aged 20–64, and education. because almost all secondary education, if ever completed, is completed before age 20. Sample for this figure (and all figures with only 2018/19 data) is limited to those in the specified age range with non-missing information on sex, age, and education. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 115 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Comparing across the consumption distribution the COVID-19 crisis: despite being relatively well- reinforces the notion that work in household diversified among different food crops, only around enterprises, especially household farms, may be more 5 percent of farm households cultivated any cash precarious. Individuals from households in the bottom crops (Ecker and Hatzenbuehler 2021). In addition, 40 percent of the consumption distribution were much only around one-quarter of Nigerian farms sell more likely than those in the top 60 percent of the their agricultural products, on average (FAO 2018). consumption distribution to be working in household Constraints on access to key inputs, such as seeds and agriculture in 2018/19 (FIGURE 6.4).153 By contrast, fertilizers, may limit agricultural productivity (Oseni and individuals in the top 60 percent were more than three Winters 2009). This, in turn, would constrain household times as likely as those in the bottom 40 percent to hold agriculture’s capacity to lift households out of poverty. wage jobs. While not a direct measure of productivity and earnings, these consumption data suggest that jobs Work in small-scale enterprises remained prevalent in household enterprises are less able to generate the and, if anything, became more widespread in the incomes required to lift households out of poverty. 10 years prior to the COVID-19 crisis. Typically, structural transformation would decrease the share of The precarity of agriculture also resonates with other workers engaged in agriculture over time. However, direct evidence on farming in Nigeria. Agricultural tracing the evolution of job types between 2010 and commercialization remained rare in the decade before 2019, the share of working-age Nigerians engaged in FIGURE 6.4. Household agriculture was more FIGURE 6.5. The prevalence of precarious prevalent among poorer households, while work did not improve in the decade before the wage work was more prevalent among richer COVID-19 crisis households Primary job type for the working-age population by Primary job type for the working-age population, 2010–2019 consumption decile, 2018/19 Percent Percent 100 100 90 90 33.5 28.8 32.7 80 80 37.7 70 70 4.4 12.6 10.0 60 1.3 60 3.0 9.6 50 22.8 50 21.1 40 29.4 40 27.1 30 30 20 38.0 20 35.9 26.3 25.6 10 10 0 0 Bottom 40 percent Top 60 percent 2010/11 2018/19 J Household agriculture J Non-farm enterprise J Trainee J Household agriculture J Non-farm enterprise J Other (trainee or unclassified) J Wage work J Not working J Wage work J Not working Source: 2018/19 GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Estimates focus on primary job, defined as the job in which the Notes: Since information on hours worked is not available in earlier GHS individual worked the most hours. Estimates averaged across post-planting waves, an alternative hierarchical definition of the primary job is used to and post-harvest visits. Sample for this figure (and all figures with only classify working individuals into job type which prioritizes wage work, then 2018/19 data) is limited to those in the specified age range with non-missing household agriculture, then non-farm household enterprises, and trainees in information on sex, age, and education. that order. Estimates averaged across post-planting and post-harvest visits. The “other” categories include trainees from the alternative hierarchical definition and working individuals who are not classified in the alternative definition. Sample restricted to individuals with non-missing observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. 153 In Nigeria, the bottom 40 percent of the consumption distribution captures mostly those who live below the national poverty line. See NBS (2020) for further details. 116 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE household agriculture actually increased, from 25.6 to differences: men were more likely to be engaged in 35.9 percent (FIGURE 6.5). Over the same period, agriculture, while women were more likely to be engaged the share of Nigerians engaged in wage work remained in commerce. In addition, individuals with higher levels virtually the same, hovering at around 10 percent. of education were less likely to work in agriculture or commerce, engaging instead in industry and other services sector activities. 6.2.2  A preponderance of jobs in precarious sectors Individuals from poorer households were substantially more likely to engage in agriculture, Agriculture, services, and commerce are the main suggesting that such work is more precarious. In sectors in which people work. Among the working-age line with the results on job type, a much larger share of population, almost nine out of 10 working individuals Nigerians in the bottom 40 percent of the consumption had primary jobs in agriculture (which comprises not distribution worked in the agriculture sector compared just household agriculture but also any wage workers or with the top 60 percent of the consumption distribution other activities linked to agriculture), commerce (retail (39.0 vs 27.4 percent, FIGURE 6.7). This, in turn, and trading activities), or services (FIGURE 6.6). About means the share of people engaged in industry, 45.1 percent of jobs were in agriculture, 19.0 percent of commerce, and services was squeezed lower for those in jobs were in commerce, and 19.8 percent of jobs were the bottom 40 percent of the consumption distribution in services. Among working youth, an even higher share compared with the top 60 percent. worked in agriculture. There were also substantial gender FIGURE 6.6. High shares of jobs were in FIGURE 6.7. Work in the agriculture sector was agriculture, commerce, and services concentrated among poorer households Primary sector of work in different population groups, Primary sector of work for the working-age population by 2018/19 consumption decile, 2018/19 Percent Percent 100 100 90 18.6 22.8 30.4 24.2 27.6 90 80 36.3 1.7 33.5 28.8 45.7 2.7 2.9 80 0.5 11.9 70 2.5 9.5 14.1 70 2.3 25.2 60 13.8 16.2 10.0 13.4 15.3 60 9.4 16.1 50 5.2 13.2 8.2 13.0 11.4 7.6 15.4 40 16.2 50 10.8 8.8 7.9 14.4 30 5.9 6.3 11.5 40 5.7 20 37.5 39.5 38.7 30 10.3 31.4 27.1 25.5 22.2 10 20 39.0 0 None or 27.4 Secondary 15–64 15–29 Men Women less than Primary or higher 10 secondary All By sex (age 15–64) By educational 0 attainment (age 20–64) Bottom 40 percent Top 60 percent J Agriculture J Industry J Commerce J Agriculture J Industry J Commerce J Services J Other or missing J Not working J Services J Other (training or missing) J Not working Source: 2018/19 GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Estimates focus on primary job, defined as the job in which the Notes: Since information on hours worked is not available in earlier GHS individual worked the most hours. Estimates averaged across post-planting waves, an alternative hierarchical definition of the primary job is used, which and post-harvest visits. Education sub-groups focus on cohorts aged 20–64, prioritizes wage work, then household agriculture, then non-farm household because almost all secondary education, if ever completed, is completed enterprises, in that order. Estimates averaged across post-planting and before age 20. Sample for this figure (and all figures with only 2018/19 data) post-harvest visits. Other or missing includes individuals who are identified is limited to those in the specified age range with non-missing information on as being in a sector explicitly named “other” and working individuals with sex, age, and education. Industry includes mining, manufacturing, utilities, missing information on sector of work. Sample restricted to individuals construction, postal/transport; services include professional and technical with non-missing observations of working status, age, sex, and education activities, public administration, education, health and personal services. across all waves of the GHS, so results differ from figures focusing only on 2018/19. Industry includes mining, manufacturing, utilities, construction, postal/transport; services include professional and technical activities, public administration, education, health and personal services. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 117 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 The share of working-age Nigerians engaged in 6.2.3  Many workers were underemployed agriculture increased over the decade prior to the pandemic. The share of workers engaged in agriculture Pre-pandemic, a large share of working individuals rose from 27.0 to 37.0 percent between 2010/11 and worked fewer than 40 hours per week; this share was 2018/19, while the shares working in industry and higher among youth, women, and those with lower services decreased (FIGURE 6.8). This provides further levels of education. Among working-age individuals, evidence that structural transformation has been in a significant portion—some 37.5 percent—were reverse in Nigeria, and it shows that informality and working fewer than 40 hours per week in 2018/19 precarity in the labor market has proliferated. The role (FIGURE 6.9). Since nearly one-third of the working- of the two crises—the 2016 oil-price recession and the age population is not working, this means that more ongoing COVID-19 crisis—in shaping these changes than half of those who were working worked fewer than in the labor market will be explored in more detail in 40 hours per week. Certain sub-groups were more likely Section 6.4. to work fewer than 40 hours per week. Concentrating on those who work, groups relatively more likely to be FIGURE 6.8. Structural transformation in reverse, 2010–19: more workers in agriculture, fewer in working under 40 hours per week included: younger services and industry people, women, and those with lower levels of education. Primary sector of work for the working-age population, About 60 percent of working youth and working women 2010–19 Percent worked fewer than 40 hours per week, a significantly 100 larger share than among non-youth and men. The fact 90 that working women worked fewer hours than working 32.7 80 37.7 40.6 39.2 men may partly reflect the challenge of juggling work 70 and household responsibilities.154 Similarly, 63.6 percent 60 12.7 11.4 10.3 10.9 of working individuals with less than primary education 50 9.4 13.8 13.6 11.9 7.3 were working fewer than 40 hours per week, a larger 40 30 7.8 8.4 8.7 relative share than among people with higher educational 20 37.0 attainment.155 Nonetheless, even among those with 10 27.0 25.4 27.4 secondary attainment or greater, a full 41.2 percent of 0 2010/11 2012/13 2015/16 2018/19 working individuals still worked under 40 hours per J Agriculture J Industry J Commerce week. Insofar as jobs in which fewer hours are worked J Services J Other or missing J Not working are more precarious, these patterns suggest that youth, Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS women, and the less-educated were more likely to be in waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household precarious working situations. This is consistent with enterprises, in that order. Estimates averaged across post-planting and post-harvest visits. Other or missing includes individuals who are identified the information on job types and sectors showing more as being in a sector explicitly named “other” and working individuals with missing information on sector of work. Sample restricted to individuals widespread precarity among these sub-groups. with non-missing observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. Industry includes mining, manufacturing, utilities, construction, postal/transport; services include professional and technical activities, public administration, education, health and personal services. 154 Early marriage, which is widespread, especially in rural areas, and family formation play a crucial role in determining women’s labor market outcomes in Nigeria (Johansson de Silva 2016). This is apparent even in the 2019/19 GHS data on hours worked: about 64.6 percent of working women in households with children under 5 worked fewer than 40 hours per week, compared with 56.5 percent of working women in households without children under 5. For working men, by contrast, there was very little difference between those in households with and without children under 5 in terms of whether they worked fewer than 40 hours per week. Nevertheless, regardless of whether children under 5 were present in the household, working women were still more likely to work fewer hours than working men. 155 The breakdowns by education focus on those aged 20–64 years, because by age 20, most individuals who would ever finish secondary education would have finished. 118 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 6.9. Youth, women, and those with lower FIGURE 6.10. More underemployment for poorer educational attainment were more likely to work Nigerians fewer than 40 hours per week Distribution of hours worked in different population groups, Distribution of hours worked among the working-age 2018/19 population by consumption decile, 2018/19 Percent Percent 100 100 90 18.6 22.9 30.4 24.2 27.6 90 80 36.3 33.5 28.8 45.7 80 70 39.8 70 60 39.1 26.4 32.1 45.4 60 50 25.4 20.9 24.2 36.2 40 50 26.3 21.7 30 19.8 19.3 20.3 40 16.7 16.3 20 30 24.2 10 17.7 17.4 18.1 19.7 20.0 17.5 16.7 15.5 20 0 None or Secondary 15–64 15–29 Men Women less than Primary or higher 10 18.1 17.5 secondary All By sex (age 15–64) By educational 0 attainment (age 20–64) Bottom 40 percent Top 60 percent J Working <20 hours per week J Working 20–39 hours per week J Working <20 hours per week J Working 20–39 hours per week J Working >=40 hours per week J Not working J Working >=40 hours per week J Not working Source: 2018/19 GHS and World Bank estimates. Source: 2018/19 GHS and World Bank estimates. Notes: Estimates averaged across post-planting and post-harvest visits. Notes: Estimates averaged across post-planting and post-harvest visits. The Education sub-groups focus on cohorts aged 20–64, because almost all sample for this figure (and all figures with only 2018/19 data) is limited to secondary education, if ever completed, is completed before age 20. The those in the specified age range with non-missing information on sex, age, sample for this figure (and all figures with only 2018/19 data) is limited to and education. those in the specified age range with non-missing information on sex, age, and education. People from poorer households were more likely to FIGURE 6.11. Wage work often meant more work hours per week than household agriculture or be underemployed, suggesting that working fewer non-farm household enterprises hours is a marker of labor market precarity. Around Average hours worked per week among workers aged 42.3 percent of people from households in the bottom 15–64 by primary job type, 2018/19 40 percent of the consumption distribution worked Percent 50 fewer than 40 hours per week, compared with 35 percent 45 of those from the top 60 percent (FIGURE 6.10). 40 43.0 41.0 40.2 Of those who were actually working, this means that 35 37.9 37.2 37.9 about 63.6 percent from the bottom 40 percent of the 30 consumption distribution worked fewer than 40 hours a 25 26.6 20 week, compared with 49.2 percent of those in the top 19.9 15 60 percent. 10 5 People working in more formal jobs generally worked 0 Household Non-farm Wage work Wage work longer hours.156 FIGURE 6.11 shows that individuals agriculture enterprise (all) (with benefits) J Post planting J Post harvest working in wage work worked more hours per week on Source: 2018/19 GHS and World Bank estimates. Notes: Chart focuses only on those individuals who report working only one average in 2018/19 than those working in household job type. Wage work with benefits is defined here as wage work jobs that offer a pension or health insurance. The sample for this figure (and all figures with agriculture or non-farm household enterprises. If these only 2018/19 data) is limited to those in the specified age range with non- missing information on sex, age, and education. additional hours are adequately remunerated, this further suggests that wage work may be less precarious 156 For simplicity, these comparisons focus only on individuals working one type of job. FIGURE 6.38 in Annex 6.3 shows that about 35.6 percent of the working population aged 15–64 worked more than one job type. Nevertheless, individuals with multiple different types of job tend to work more hours, as FIGURE 6.39 in Annex 6.3 shows. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 119 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 than work in farm and non-farm household enterprises sample selection, as the share of working-age women in (Fox and Gandhi 2021). However, those wage workers wage employment in the first place is around half the with in-work benefits, namely pensions and health share of working-age men (FIGURE 6.13). insurance, worked fewer hours than those in wage work without benefits. This suggests that the relationship between job formality and precarity, and the number of 6.2.5  Non-farm enterprises were typically hours worked, is not always straightforward. very small scale Pre-COVID data show that non-farm household 6.2.4  Even wage jobs often lacked certain enterprises in Nigeria were almost all very small, markers of formality, especially for suggesting that their activities were both low younger workers productivity and precarious. About 86.3 percent of Nigeria’s non-farm household enterprises did not hire Only a small share of wage workers had jobs with any employees from outside the household, instead in-work benefits; this share was even smaller among relying on the unpaid labor of household members young wage workers. Just 36.1 percent of wage workers (FIGURE 6.13). Among the few enterprises that did in the working-age population as a whole had jobs with engage outside workers, most hired only one or two. a pension or health insurance, and this share was even Moreover, enterprises from poor households were even smaller for young people, at just 8.1 percent of wage jobs less likely to have external employees; this suggests (FIGURE 6.12). A much larger share of wage workers that small-scale enterprises are less able to generate the had written contracts (64.7 percent), but they were far earnings required to lift people out of poverty. from ubiquitous. Interestingly, in-work benefits appeared to be more widespread for wage-employed women than Non-farm household enterprises engaged in wage-employed men. However, this is likely related to commerce were especially likely to be small scale. FIGURE 6.12. In-work benefits were less prevalent FIGURE 6.13. Most non-farm household for younger wage workers enterprises are small scale, with no external employees, especially in poor households Share of wage workers with in-work benefits in different Number of employees from outside the household in population groups, 2018/19 households' primary non-farm enterprise by decile of the consumption distribution, 2018/19 Percent Percent 80 100 4.2 3.0 4.6 3.4 2.0 3.9 4.0 70 90 6.1 6.9 70.8 64.7 80 60 61.4 70 50 60 40 40.8 50 36.1 37.9 91.2 35.1 86.3 84.5 30 40 20 30 20 10 8.1 10 0 All Youth Men Women 0 (15–64) (15–29) (15–64) (15–64) All Bottom 40 percent Top 60 percent J Written contract J Pension or health insurance J None J 1 person J 2 people J 3+ people Source: 2018/19 GHS and World Bank estimates. Source: 2018/19 GHS and World Bank estimates. Notes: Estimates averaged across post-planting and post-harvest visits. The Notes: Estimates averaged across post-planting and post-harvest visits. sample consists of individuals who hold any type of wage job. 120 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 6.14. Non-farm enterprises that engaged FIGURE 6.15. Low labor-market returns to in commerce were smaller scale, on average, than secondary education those engaged in industry and services Number of employees from outside the household in Detailed primary job type for 30–64-year-olds by educational households' primary non-farm enterprise by sector, 2018/19 attainment, 2018/19 Percent Percent 100 2.0 100 6.2 6.7 2.2 4.8 13.2 12.0 14.9 90 4.9 4.6 90 24.9 1.9 4.6 6.5 8.1 5.5 80 80 11.5 1.8 70 70 33.2 60 60 32.2 39.3 50 46.4 50 16.5 91.1 40 40 82.3 80.5 30 30 20.2 20 40.7 39.7 20 25.0 10 14.9 10 0 None or less 0 than primary Primary Secondary Tertiary All Bottom 40 percent Top 60 percent (40 percent) (24 percent) (20 percent) (15 percent) J None J 1 person J 2 people J 3+ people J Household agriculture J Non-farm enterprise J Trainee J Wage work without benefits J Wage work with benefits J Not working Source: 2018/19 GHS and World Bank estimates. Source: 2018/19 GHS and World Bank estimates. Notes: Estimates averaged across post-planting and post-harvest visits. Less Notes: The percentage shown for each educational category indicates the than 2 percent of non-farm enterprises engaged in agricultural activities, proportion of the sample of 30–64-year-olds who were in that category. Age so these are not shown. Industry includes mining, manufacturing, utilities, is restricted to over 30 years in this particular sample, unlike other samples, construction, postal/transport; services include professional and technical to capture individuals that could have finished tertiary education. Estimates activities, public administration, education, health and personal services. focus on primary job, defined as the job in which the individual worked the most hours. Estimates averaged across post-planting and post-harvest visits. Sample for this figure (and all figures with only 2018/19 data) is limited to those in the specified age range with non-missing information on sex, age, and education. Around 91.1 percent of commerce enterprises157 did not 49.7 percent for those who had completed tertiary employ anyone outside the household compared with education (FIGURE 6.15). For all lower educational 82.3 percent in industry and 80.5 percent in services categories, the share holding a wage job was even lower. (FIGURE 6.14). This suggests that these types of Perhaps more notable, even among Nigerians who had commerce activities may be particularly precarious. completed tertiary education, 41.2 percent of those working were still not working in wage jobs, and not all wage jobs had benefits such as pensions or health 6.2.6  Education did not guarantee a insurance. This is also consistent with the finding that pathway out of precarity more-educated Nigerians were spending longer periods unemployed and searching for a job.158 This suggests Ì Acquiring an education does not assure people a that, prior to the COVID-19 crisis, Nigeria already wage job, namely those jobs that are associated with faced a shortage of high-quality jobs, and that the jobs less labor market precarity landscape was not adjusting to any increase in human The share holding a wage job was just 16.1 percent in capital associated with rising educational attainment. 2018/19 for those with secondary education, but was 157 Around 49.5 percent of non-farm enterprises were engaged in commerce in 2018/19. Of these, 9.6 percent were in “wholesale and retail trade and repair of motor vehicles”, 2.9 percent were in “wholesale trade, except of motor vehicles”, and 87.5 percent were in “retail trade, except of motor vehicles.” 158 While higher unemployment rates among the more highly-educated may seem counter-intuitive, evidence from other countries and in this brief shows that being able to not work and take the time to search is a relative luxury; when households are hit by economic shocks, they tend to work more. Thus, to the extent that more highly-educated people come from richer households, they can spend more time not working to search for better jobs. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 121 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 6.3  Leaving school, seeking work: risky 6.3.1  Following the 2016 oil-price shock, trade-offs for youth in crisis times many young Nigerians cut their schooling short Since precarious jobs are widespread, as shown in Section 6.2, many Nigerian households are vulnerable Overall, the share of working-age Nigerians who to economic shocks. This section shows how people were working increased in response to the country’s have responded to the two recent shocks—Nigeria’s 2016 recession, especially among young people. 2016 oil-price recession and the ongoing COVID-19 The proportion of Nigeria’s working-age population crisis. The analysis focuses in particular on the trade-off that was working increased from 60.8 percent in that young people face during an economic downturn; 2015/16 to 67.3 percent in 2018/19 (FIGURE 6.16). specifically, between entering the labor market early This post-recession increase in working rates was even versus staying in school. Learning about labor-market more pronounced for young people: from 2015/16 to responses after the 2016 oil-price recession can offer 2018/19, youth working rates increased from 38.6 to policy insights for the current COVID-19 crisis. 50.7 percent, a surge of 12.1 percentage points. The rise in working rates among young people following the 2016 oil-price recession corresponded to less time in school, accelerated labor-market entry, and hence lower attainment of secondary education. While secondary educational attainment among 20–25-year-olds increased from 2010/11 to 2015/16, it dropped substantially between 2015/16 and 2018/19 FIGURE 6.16. Working rates increased after the FIGURE 6.17. Stocks of human capital among 2016 oil-price recession, particularly among youth young people declined after 2015/16 Share of people working by age group, 2010–19 Educational attainment among 20–25-year-olds, 2010–19 Percent Percent 80 70 2010/11 23.2 26.5 50.3 67.3 60 62.3 60.8 59.4 2012/13 22.0 25.2 52.7 50 50.7 40 39.3 38.6 34.6 2015/16 17.9 22.6 59.5 30 20 2018/19 25.0 22.8 52.2 10 0 2010/11 2012/13 2015/16 2018/19 0 20 40 60 80 100 J Age 15–64 J Age 15–29 J None or less than primary J Primary J Secondary or higher Source: GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Estimates averaged across post-planting and post-harvest visits. Notes: “None or less than primary” refers to individuals who have not fully In this figure, trainees and unclassified individuals are classified as working attained primary education. “Primary” refers to attainment of at least full so that the share of people not working is consistent with previous figures. primary education but not full secondary education. “Secondary or higher” Sample restricted to individuals with non-missing observations of working refers to attainment of senior secondary completion or higher. Chart focuses status, age, sex, and education across all waves of the GHS, so results differ on those aged 20–25 years because almost all Nigerians who complete from figures focusing only on 2018/19. secondary education do so before age 20. Estimates averaged across post- planting and post-harvest visits. 122 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE (FIGURE 6.17).159 Focusing on this age range provides 63.4 percent between 2007 and 2008.161 Thus, the drop an accurate picture of secondary educational attainment in secondary school attainment among 20–25-year-olds among young people, since almost all Nigerians who following the 2016 oil-price recession was accompanied complete secondary education do so by age 20.160 This by the legacy of patterns in primary schooling in the late result appears to be independent of ongoing conflict 2000s. shocks, which may have been occurring at the time and could also have contributed to declining educational Following the 2016 oil-price recession, secondary attainment. When zones that typically experience more school graduates were more likely to seek work violence and conflict are excluded from the analysis, the than continue their education. Whereas from 2010 decline in secondary educational attainment rates among to 2016 the share of 20–25-year-old secondary school 20–25-year-olds between 2015/16 and 2018/19 is, if graduates who were still in education increased from anything, slightly larger (FIGURE 6.40). about 30.9 to 39.0 percent, this share subsequently contracted significantly, dropping to 12.6 percent That the share of 20–25-year-olds with less than in 2018/19 (FIGURE 6.18). Meanwhile, the share primary education rose following the 2016 oil-price of recent secondary school graduates working in recession is likely the result of the sharp decline in household enterprises—both agricultural and non- primary enrolment that took place in the late 2000s. farm enterprises—hovered at between 29.1 and The drop in secondary attainment among 20–25-year- 31.3 percent during the 2010–16 period, but increased olds between 2015/16 and 2018/19 was accompanied to 48.0 percent in 2018/19. Similarly, the share of by a 6.4-percentage-point increase in the share with less 20–25-year-olds engaged in wage work, which had than primary education, with the share that had attained been stable at 6–7 percent, increased to 10.8 percent in primary education (but less than secondary) rising much 2018/19. more modestly, by 1.4 percentage points. On the face of it, this is somewhat puzzling; if individuals paused their Transitions from school into work for all young secondary education around the time of the 2016 oil- people began increasing around the time of the price recession, they should still have attained primary 2016 oil-price recession. FIGURE 6.19 shows the education. The sharp rise in the share of 20–25-year- probabilities associated with transitioning from school olds with less than primary education can, however, be into different working situations. For each time period explained by events prior to the 2016 oil-price recession. shown, a panel of individuals is created, focusing on Those who were aged 20–25 in 2018/19 would be the sub-sample of 15–29-year-olds who were in school making constrained decisions around primary school in the first period. The probability of moving from completion 10 (or more) years earlier, when they were schooling into household agriculture increased from aged 10–15. Given the patterns shown in FIGURE 2.8 percent for the 2010–12 period to 7.1 percent for 6.17, it is therefore unsurprising that primary school the 2015–18 period. Flows from schooling into non- enrolment dropped sharply around 2008 according to farm household enterprises also increased. The pattern UNESCO Institute for Statistics data. Specifically, the of individuals’ responding to the 2016 oil-price recession net primary school enrolment rate fell from 70.3 to by reducing schooling is consistent with the observed 159 FIGURE 6.17 suggests that the 2016 recession had an immediate impact on school dropout, but this took time to feed through fully to attainment. For example, if 16-year-olds are pushed out of education by a shock, this will not be reflected in the attainment rates of 20–25-year-olds until four years later. 160 Additional calculations from the 2018/19 GHS show that virtually all of those who ever complete secondary or higher education complete their secondary education between the ages of 15 and 20. 161 See https://data.worldbank.org/indicator/SE.PRM.NENR?locations=NG for UNESCO Institute for Statistics data. Similar patterns emerge looking at the Nigeria Demographic and Health Survey data for 2003, 2008, and 2013 (see https://www.statcompiler.com/en/). The GHS data on which the remainder of the report rely cannot be extended before 2010/11. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 123 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 drop in educational attainment among 20–25-year-olds, observed decline in schooling has long-term implications as most young people complete secondary school around for Nigeria’s structural transformation and inclusive ages 15–18. growth. Together, the previous three figures illustrate the “Counterfactual” analysis suggests that young difficult trade-off between education and work facing people’s switch into work at the expense of education Nigerian households during times of economic crisis. stems primarily from the 2016 oil-price recession, In the face of a negative economic shock, compounded rather than from other changes that took place by rising food and commodity prices, credit-constrained between 2015 and 2019. One concern with the households may not have the resources to continue preceding analysis is that other factors, including allowing children and youth to go to school. Not only demographics and migration, may have changed might there be direct costs associated with going to independently of—but at the same time as—the oil-price school, such as school fees, learning materials, and recession, so the effects on the trade-off between working uniforms, but also households often face an opportunity and schooling are not a product of the recession per se. cost, since children in full-time education will not be However, using detailed individual-level information able to spend as much time helping the household earn from the GHS makes it possible to control for these income through supporting household agricultural and other changes to isolate the impact of the recession. This non-farm enterprise activities. As discussed below, this analysis, which is described in Annex 6.2, indicates that FIGURE 6.18. Secondary-school graduates after FIGURE 6.19. Tough trade-offs between school the oil recession: less likely to continue their and work: rising transition rates from school to education, more likely to work in household the labor market after 2015/16 enterprises Labor market status of 20–25-year-olds with secondary Work status of 15–29-year-olds that started as students in education, 2010–19 the previous period, 2010–18 Percent Percent 100 6.0 6.1 25 6.6 10.8 90 14.0 12.3 15.1 22.5 80 18.4 20 21.0 9.9 70 19.0 19.8 18.4 9.7 12.2 15 60 3.5 8.8 7.1 50 3.1 6.2 6.1 5.9 40 10 39.0 12.6 35.7 30 30.9 7.3 7.1 6.7 5 6.0 20 29.6 3.6 4.2 10 19.0 2.8 2.9 14.0 14.2 1.3 1.6 1.9 1.5 0 0 Not working Not working Not working Not working Not working 2010/11 2012/13 2015/16 2018/19 - student - student - student - student - student J Household agriculture J Student J Other inactive J 2010–2012 J 2012–2015 J 2015 –2018 J Active search J Unclassified or available J Absent J Trainee J Non-farm household enterprise J Wage work Source: GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Chart focuses on those aged 20–25 years because almost all Notes: Estimates calculated using data from post-planting visit only. The Nigerians who complete secondary education do so before age 20. Since sample for each time period consists of the subset of individuals aged 15–29 information on hours worked is not available in earlier GHS waves, an who are in school at the beginning of the period. This figure compares the alternative hierarchical definition of the primary job is used, which prioritizes probability of transitioning from student status to different working situations wage work, then household agriculture, then non-farm household enterprises, by the next wave. in that order. Estimates averaged across post-planting and post-harvest visits. “Available” individuals are those who indicate they are available for work but are not working, not searching, not absent, and not inactive. “Unclassified” individuals are those who remain unclassified after a hierarchical classification of job status. Sample restricted to individuals with non-missing observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. 124 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE changes in observable individual characteristics, and any 6.3.2  Higher working rates and other unobserved characteristics that are correlated with withdrawal from education during the such observed characteristics, cannot explain the large COVID-19 crisis changes in education and labor market outcomes for a particular youth cohort of 20–25-year-olds. More recent data show large increases in working rates during the COVID-19 crisis. This can be This “counterfactual” analysis therefore suggests seen by comparing how the share of people working that it was indeed the oil-price recession that pushed evolved in two agricultural cycles; one before the Nigerians out of school and into precarious work. COVID-19 pandemic and one after the pandemic In line with FIGURE 6.17, the counterfactual analysis hit.162 Each agricultural cycle consists of a “post- suggests that the oil-price recession led to around an planting” season around July–September—when 8-percentage-point drop in the share of 20–25-year- demand for agricultural labor would typically be olds reaching secondary educational attainment between higher—and a “post-harvest” season in January– 2015/16 and 2018/19. The counterfactual analysis also February—when demand for agricultural labor would suggests that the oil-price recession increased the labor typically be lower. In the 2018/19 agricultural cycle, force participation rate of 20–25-year-olds in 2018/19 before the COVID-19 pandemic, working rates sharply by as much as 20 percentage points. This reinforces the decreased, from 77.3 percent in July–September 2018 difficult trade-off between education and work facing to 63.7 percent in January–February 2019, a decline of Nigerian youth during times of economic crisis. some 13.6 percentage points (FIGURE 6.20). However, FIGURE 6.20. Higher working rates during the FIGURE 6.21. An overall drop in school rates, 2021 post-harvest season, amid COVID-19 largest among older children Working situation of the working-age population, 2018–21 Share of children in school among sub-sample of children whose schools were operating in October 2020 and who were not experiencing shocks directly related to the COVID-19 crisis Percent Percent 100 100 90 22.7 90 28.3 30.4 80 36.3 80 70 70 60 60 50 50 90.0 89.0 90.5 86.7 83.1 83.8 81.9 75.6 40 77.3 -13.6 71.7 -2.1 69.6 40 30 63.7 30 20 20 10 10 0 Jul–Sep 2018 Jan–Feb 2019 Jul–Sep 2018 Jan–Feb 2019 0 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) Oct 2020 J Working J Not working J Age 5–18 J Age 5–11 J Age 12–18 J Age 15–18 Source: 2018/19 GHS, NLPS, and World Bank estimates. Source: Excerpt from Table 2 in Dessy et al. (2021), based on GHS and Notes: The sample is a panel of individuals observed across the relevant NLPS. 2018/19 GHS visits and NLPS rounds. Notes: As per Dessy et al. (2021), individuals who attributed non-attendance in October 2020 to (1) their schools still being closed, (2) still being on holiday, (3) being afraid of contracting COVID-19, and (4) waiting for admission were excluded from the sample. Individuals are classified as attending school before COVID-19 if: (1) the respondent attended school at any time during the 2019/20 school year; (2) the respondent attended classes on-site or remotely since schools reopened; or (3) at the time of the survey the respondent attended school during the 2020/21 academic year. 162 The two surveys had different modalities: the GHS was an in-person survey, while the NLPS was conducted over the phone. As such, within-survey changes are compared where possible, rather than directly comparing estimates from the two different surveys. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 125 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 in the 2020/21 cycle, working rates only fell by about largely engage in household agriculture and non-farm 2.1 percentage points, from about 71.7 percent in household enterprise activities, which may be precarious September 2020 to about 69.6 percent in January and informal; these jobs were widespread even before 2021. This seasonal decline is much lower than the the oil-price recession and the COVID-19 crisis. The corresponding pre-COVID-19 decline, suggesting opportunity cost of higher working rates is particularly elevated working rates during the 2021 post-harvest salient for the youth—instead of going to school and period. accumulating human capital, young people are forced to enter the labor market to cope with negative economic The increase in working rates following the shocks to their household. To further explore this issue, COVID-19 crisis coincides with a decrease in the the next section analyzes how precarity—proxied by job share of children going to school, particularly older types and sectors of work—evolved during the oil-price children. Among a sub-sample of eligible students recession and the COVID-19 crisis. whose schools were operating in October 2020 and who were not experiencing shocks not directly related to the COVID-19 crisis, the share of children going to school 6.4  Growing labor-market precarity, was still significantly lower in October 2020—even after especially among youth many of Nigeria’s COVID-19 lockdown restrictions were relaxed—compared with January–February 2019 Section 6.2 presented evidence pointing to the (FIGURE 6.21, excerpt from Dessy et al. (2021)). widespread precarity of jobs before the COVID-19 While there is no way to directly measure the extent to crisis, and Section 6.3 showed that working rates which this decline stems from regular seasonal changes increased in response to both the 2016 oil-price in schooling rates, as the data come from different recession and the ongoing COVID-19 crisis at months it is notable that the drop in schooling rates is the expense of continued schooling for the youth concentrated among older children, particularly in the population. This section, Section 6.4, demonstrates that 15–18 age group. Since schooling is not compulsory the increase in labor supply—and hence working rates— for this age group, it may be that older children did not corresponds to an increase in the already widespread return to school so that they could contribute to earning precarity of jobs, which provides supporting evidence income for the household. for an increase in labor supply driving the increase in working rates, rather than an increase in the demand for labor. Insofar as agriculture becomes a more important 6.3.3  What do higher working rates tell source of jobs, this means that any progress on structural us? transformation in the Nigerian labor market could be reversed. Higher working rates might seem like good news, as they could imply more income, but they can also reflect a last-ditch coping mechanism for households 6.4.1  Expanding precarity and informality during a crisis. In the Nigerian labor market, increasing after the 2016 oil-price shock working rates are likely to represent a coping mechanism to deal with negative shocks to household income, rather The share of Nigerians working in agriculture began than a response to improving job conditions. Indeed, increasing in 2015/16 and has continued to expand. most Nigerians lack access to private or public safety Between 2010/11 and 2012/13, the share of Nigerians nets, so they cannot afford to be unemployed or to working in household agriculture was stable, even spend long periods searching for good jobs. Instead, they slightly decreasing from 25.6 to 24.2 percent (FIGURE 126 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE 6.22). By 2015/16, the proportion had risen slightly, market. By taking advantage of the longitudinal nature to 27.9 percent. Between 2015/16 and 2018/19, of the GHS, it is possible to trace how individuals however—following the oil-price recession—the share transitioned between different labor market situations of Nigerians working in household agriculture jumped between 2010 and 2019. Focusing on the post-planting to 35.9 percent. Similar results emerge when looking at data, around 23.4 percent of those engaged in non-farm the labor market’s sectoral composition, with the share enterprises in 2015/16 and 11.6 percent of wage workers of workers engaged in agriculture rising at the expense of had switched into household agriculture by 2018/19 industry and commerce between 2015/16 and 2018/19 (see the transition matrices in Annex 6.4).163 This flow (FIGURE 6.23). This resonates with the macroeconomic was significantly higher than in previous years: about data from this period, which demonstrate that the 2016 8.8 percent of those engaged in non-farm enterprises in oil-price recession affected real GDP growth in industry 2010/11 and 8.7 percent of wage workers had switched and services significantly more than agriculture (World into household agriculture by 2012/13. Thus, labor Bank, 2021). market churning appeared to intensify following the 2016 oil-price recession: this could reflect individuals The workers turning to agriculture following the seeking income-generating opportunities to cope with 2016 oil-price recession were not only new labor the economic shock, even if not in the activities to which market entrants; they also flowed in from other they were best suited. activities, demonstrating “churning” in the labor FIGURE 6.22. The share of Nigerians engaged in FIGURE 6.23. In a reversal of structural household agriculture jumped after the 2016 oil- transformation trends, the share of working price recession individuals in the agricultural sector increased after the 2016 oil-price recession Primary job type for the working-age population, 2010–19 Primary sector of work for the working-age population, 2010–19 Share of working-age population, percent Share of working-age population, percent 100 100 90 90 32.7 32,7 80 37.7 40.6 39.2 80 37,7 40,6 39,2 70 70 2,7 10.0 1,0 1,4 60 9.6 0.3 60 0,6 10,9 9.2 9.5 12,7 10,3 0.1 11,4 50 50 9,4 21.1 13,8 11,9 40 27.1 23.5 40 13,6 7,3 26.0 7,8 8,7 30 30 8,4 20 35.9 20 37,0 25.6 27.9 27,0 25,4 28,4 24.2 10 10 0 0 2010/11 2012/13 2015/16 2018/19 2010/11 2012/13 2015/16 2018/19 J Household agriculture J Non-farm enterprise J Other J Wage work J Agriculture J Industry J Commerce J Not working J Services J Other or missing J Not working Source: GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS Notes: Since information on hours worked is not available in earlier GHS waves, an alternative hierarchical definition of the primary job is used, which waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Estimates averaged across post-planting and post- enterprises, in that order. Estimates averaged across post-planting and harvest visits. The “other” categories include trainees from the alternative post-harvest visits. Other or missing includes individuals who are identified hierarchical definition and working individuals who are not classified in the as being in a sector explicitly named “other” and working individuals with alternative definition. Sample restricted to individuals with non-missing missing information on sector of work. Sample restricted to individuals with observations of working status, age, sex, and education across all waves of non-missing observations of working status, age, sex, and education across the GHS, so results differ from figures focusing only on 2018/19. all waves of the GHS, so results differ from figures focusing only on 2018/19. Industry includes mining, manufacturing, utilities, construction, postal/ transport industries; services include professional and technical activities, public administration, education, health, and personal services. 163 Similar results emerge when using the post-harvest data to construct the transition matrices. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 127 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 6.4.2  Rising precarity and informality for 2018/19, the share of working-age Nigerians doing wage young people after the 2016 recession work—which appears to be less precarious than other job types, all other things equal—increased slightly, from 9.5 The relative increase in the share of youth working to 10.0 percent (FIGURE 6.25). Over the same period, in household agriculture was even larger than for the the share of the youth population engaged in wage work general working-age population. Between 2010/11 rose from 4.1 to 5.7 percent. However, this says nothing and 2012/13, the share of youth engaged in household about the quality of the additional wage jobs. agriculture dropped from 18.9 to 16.5 percent (FIGURE 6.24). However, by 2015/16, the share of youth working While increases in the share of people engaged in in household agriculture had increased to 21.7 percent, wage work, however slight, might look like progress, and by 2018/19—following the oil-price recession— measures of in-work benefits among wage workers it had jumped to 30.4 percent. In relative terms, this tell a different story. The share of wage workers represents a larger increase than for the full working- with written contracts or pension or health insurance age population, as the share of young people engaged in decreased between 2015/16 and 2018/19 (FIGURE household agriculture was lower to begin with. 6.26). Moreover, the drop in the prevalence of in-work benefits was larger among youth wage workers, for FIGURE 6.24. Among youth, increases in working rates after the 2016 recession were also whom the share with written contracts fell from 54.9 concentrated in household agriculture to 40.7 percent, and the share with pensions or health Primary job type among the youth population, 2010–19 insurance fell from 14.9 to 9.6 percent. Share of youth population, percent 100 90 80 6.4.4  Post-COVID-19 crisis, a new pattern 70 60.7 65.4 61.4 49.3 of even greater precarity? 60 50 5.7 Many Nigerians have turned to non-farm household 40 4.9 4.3 4.1 13.9 enterprises engaged in services and commerce to 30 15.5 13.8 12.8 cope with the effects of the COVID-19 crisis. Once 20 10 21.7 30.4 again, this can be seen by comparing how the share 18.9 16.5 0 of people working in different sectors evolved in two 2010/11 2012/13 2015/16 2018/19 agricultural cycles, before and after the pandemic struck. J Household agriculture J Non-farm enterprise J Other (trainee or unclassified) J Wage work J Not working Before the pandemic, comparing people’s job types Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS between July–September 2018 and January–February waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household 2019, the share of working-age Nigerians engaged in enterprises, in that order. Estimates averaged across post-planting and post- harvest visits. The “other” categories include trainees from the alternative non-farm household enterprises rose by 3.2 percentage hierarchical definition and working individuals who are not classified in the alternative definition. Sample restricted to individuals with non-missing points. Then, after the pandemic began, between observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. September 2020 and February 2021, this share rose by 8.0 percentage points (FIGURE 6.27). Turning to sectoral shares, between July–September 2018 and 6.4.3  Expanding wage work? January–February 2019, the share of working-age people engaged in services decreased by about 2.6 percentage The share of Nigerians engaged in wage work actually points. However, between September 2020 and February increased slightly following the oil-price recession, 2021, this share increased by 2.5 percentage points especially among young people. Between 2015/16 and (FIGURE 6.28). Between July–September 2018 and 128 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE January–February 2019, the share of working-age people These patterns therefore differ from the changes in job engaged in commerce rose by 2.8 percentage points, but type and economic sector observed after the 2016 oil- between September 2020 and February 2021 the share price recession, when more people engaged in agriculture increased much more, by around 6.7 percentage points. at the expense of services. FIGURE 6.25. Large increases in wage work FIGURE 6.26. In-work benefits for wage workers among youth became less prevalent after the 2016 recession Share of people working in wage jobs by age group, Share of wage workers with in-work benefits in different 2010–19 population groups, 2015–19 Percent Percent 12 90 80 75.8 75.5 76.3 10 71.7 10.0 70 69.2 67.9 9.6 9.5 9.2 8 60 54.9 50 43.3 44.2 40.7 41.7 6 40 38.0 39.0 36.3 5.7 4.9 30 4 4.3 4.1 20 14.5 9.6 2 10 0 Men Women Men Women 0 15–64 15–29 (15–64) (15–64) 15–64 15–29 (15–64) (15–64) 2010/11 2012/13 2015/16 2018/19 Written contract Pension or health insurance J Age 15–64 J Age 15–29 J 2015/16 J 2018/19 Source: GHS and World Bank estimates. Source: 2018/19 GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS Notes: Estimates averaged across post-planting and post-harvest visits. The waves, an alternative hierarchical definition of the primary job is used, which sample consists of individuals who hold any type of wage job. prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Estimates averaged across post-planting and post- harvest visits. The “other” categories include trainees from the alternative hierarchical definition and working individuals who are not classified in the alternative definition. Sample restricted to individuals with non-missing observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19 FIGURE 6.27. Rising participation in non-farm FIGURE 6.28. Sectoral shifts amid COVID-19: a household enterprises during the COVID-19 crisis jump in services and commerce Primary job type of the working-age population, 2018–21 Primary job type of the working-age population, 2018–21 Share of working-age population, percent Share of working-age population, percent 100 100 90 22.7 90 22.7 +13.6 28.3 30.4 28.3 30.4 36.3 36.3 +2.1 80 80 9.6 70 8.6 70 17.0 -2.6 10.5 12.6 +2.5 60 8.1 60 15.1 14.4 31.4 +3.2 14.3 +2.8 50 50 18.8 +6.7 32.4 +8.0 40 40 9.3 17.7 25.5 34.6 40.4 5.0 30 30 11.4 7.9 20 35.6 20 36.7 35.2 28.8 10 18.2 16.7 10 20.9 21.1 0 0 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) J Household agriculture J Non-farm enterprise J Trainee J Agriculture J Industry J Commerce J Wage worker J Not working J Services J Not working Source: 2018/19 GHS, NLPS, and World Bank estimates. Source: 2018/19 GHS, NLPS, and World Bank estimates. Notes: Estimates focus on primary job, defined as the job in which the Notes: Estimates focus on primary job, defined as the job in which the individual worked the most hours. The sample is a panel of individuals individual worked the most hours. The sample is a panel of individuals observed across the relevant 2018/19 GHS and NLPS rounds. observed across the relevant 2018/19 GHS visits and NLPS rounds with non-missing information on sector. In this figure, industry includes mining, manufacturing, utilities, construction, postal/transport industries and professional, while services include public administration, education, health, personal services, and business services. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 129 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Ì Non-farm enterprise incomes appear to be most While the share of people working increased during threatened by the COVID-19 crisis, so the expansion the oil-price recession and the COVID-19 crisis, this of these jobs could mark a new form of labor market precarity appears to be because Nigerians were taking on more precarious work; yet this begs the question of who With the onset of the pandemic there was widespread was most affected. In both crises, more individuals were stress on all income sources. Nonetheless, by January “pushed” into the labor force and increased their labor 2021, incomes from several sources had begun to supply to cope with the economic shocks; there is little recover for many households: between August 2019– evidence that more job creation or better wages and January 2020 and August 2020–January 2021, benefits—an indication of increased demand for labor— agricultural incomes had increased or stayed the same “pulled” workers into the labor force. If such an increase for 66.6 percent of agricultural households, while in the demand for labor existed, the number of people wage incomes had increased or stayed the same for in wage jobs would be expanding without a decrease in 79.3 percent of households with wage-employed job quality, and non-farm enterprise income would be members (FIGURE 6.29). However, over the same more stable. The analysis above suggests that the crises period, non-farm enterprise incomes had still decreased have particularly exacerbated job precarity among for 41.8 percent of households with non-farm Nigeria’s young people, although youth are not the only enterprises. As such, growth in these jobs during the population sub-group disproportionately impacted. To COVID-19 crisis does not seem to represent improved further explore these dynamics, Section 6.5 considers income and productivity from this sector, suggesting wealth and gender differences in the response to Nigeria’s no progress toward structural transformation. Instead, recent economic shocks. individuals are seeking non-farm enterprise work to boost household incomes—potentially in vain, given that such work appears to be less lucrative—to try and 6.5  Differential impacts of economic cope with the effects of the COVID-19 crisis. crises on the poor and on women and girls FIGURE 6.29. Incomes from non-farm household enterprises remained the most precarious as the COVID-19 crisis continued This section examines how the labor-market and Changes in income during the COVID-19 crisis education effects of the 2016 oil-price recession and Share of households with each income source, percent the COVID-19 crisis differed for Nigerians from poor 100 90 20.7 and non-poor households, and for women and girls 80 33.4 41.8 compared with men and boys. The analysis builds on 70 72.6 57.9 and refines the broader picture presented in Sections 6.2, 60 6.3, and 6.4. 14.1 84.6 44.8 50 14.0 40 30 52.5 37.4 6.5.1  Labor-market impacts of the 2016 20 44.2 18.2 34.5 oil-price crisis were largest among non- 10 9.4 9.3 6.1 4.7 0 3/20 to 4–5/20 8/19–1/20 to 8/20–1/21 3/20 to 4–5/20 8/19–1/20 to 8/20–1/21 3/20 to 4–5/20 8/19–1/20 to 8/20–1/21 poor households Household agriculture Non-farm household enterprises Wage-employment J Increased J No change J Decreased Source: NLPS and World Bank estimates. The impact of the 2016 oil-price recession on the Notes: Estimates capture the share of households with each income source in the starting period, that is, in March 2020 and in August 2019–January 2020. share of people working, especially on the share working in household agriculture, was larger for Nigerians in the top 60 percent of the consumption 130 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE distribution. Between 2015/16 and 2018/19, the share 27.6 to 44.2 percent. Once again, this increase was of working-age people in the bottom 40 percent of the starkest when focusing on the share of people working consumption distribution who were working increased in household agriculture. Indeed, the share of young from 62.0 to 65.6 percent, with the share engaged in Nigerians in the top 20 percent who worked in household agriculture rising from 38.1 to 42.8 percent household agriculture almost doubled between 2015/16 (FIGURE 6.30). Over the same period, the share and 2018/19. The trade-off between working versus of working-age people in the top 60 percent of the continuing education may have been sharper for young consumption distribution who were working increased people from richer households; meanwhile, young from 59.9 to 68.1 percent, with the share engaged in people from poorer households were not planning household agriculture rising substantially, from 21.3 to to continue education even before the 2016 oil-price 32.0 percent. recession occurred, resulting in less change in their labor market participation. The differential impacts of the oil-price recession across the consumption distribution were even The shares of women and men who were working, starker for young people, especially those in the top especially in household agriculture, both increased 20 percent. Between 2015/16 and 2018/19, the share by comparable amounts following the 2016 oil- of young Nigerians in the bottom 40 percent of the price recession. The share of women who were working consumption distribution who were working rose from increased from 56.4 to 61.8 percent between 2015/16 45.2 to 53.4 percent (FIGURE 6.31). For young people and 2018/19, with the share engaged in household in the top 20 percent of the consumption distribution, agriculture rising from 20.7 to 29.7 percent (FIGURE the corresponding share increased more steeply, from 6.32) Increased engagement in household agriculture FIGURE 6.30. After the oil-price recession, working FIGURE 6.31. Young people from non-poor rates increased most among non-poor Nigerians households increased their working rates most after the 2016 oil-price recession Primary job type for the working-age population by Primary job type for the youth population by consumption consumption decile, 2010–19 decile, 2010–19 Share of working-age population, percent Share of youth population, percent 100 100 90 90 34.4 31.9 80 37.9 41.3 38.0 37.8 40.5 40.1 80 46.6 47.7 57.5 54.8 60.3 55.8 70 70 61.3 66.3 62.1 66.7 71.2 72.4 4.9 12.8 60 4.1 5.1 60 3.9 12.9 2.5 17.7 12.5 12.2 5.3 50 18.7 50 2.7 12.5 22.3 21.2 2.7 22.9 2.2 11.6 4.7 14.8 11.1 40 40 4.4 13.7 12.9 4.5 30.0 28.9 26.3 17.1 14.3 9.0 30 30 7.8 6.2 14.6 14.5 38.1 15.3 20 42.8 20 25.8 30.9 31.3 14.0 12.4 35.6 33.6 38.1 23.6 19.2 32.0 17.8 14.6 17.9 10 19.3 21.3 10 8.9 7.0 9.0 18.1 1 1 1 3 6 9 3 6 9 3 6 9 0 0 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 /1 10 10 10 12 15 18 12 15 18 12 15 18 2010/11 2012/13 2015/16 2018/19 2010/11 2012/13 2015/16 2018/19 20 20 20 20 20 20 20 20 20 20 20 20 Bottom 40 percent Top 60 percent Bottom 40 percent 40th–80th percentile Top 20 percent J Household agriculture J Non-farm enterprise J Other (trainee or unclassified) J Household agriculture J Non-farm enterprise J Other (trainee or unclassified) J Wage work J Not working J Wage work J Not working Source: GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS Notes: Since information on hours worked is not available in earlier GHS waves, an alternative hierarchical definition of the primary job is used, which waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Estimates averaged across post-planting and post- enterprises, in that order. Estimates averaged across post-planting and post- harvest visits. The “other” categories include trainees from the alternative harvest visits. The “other” categories include trainees from the alternative hierarchical definition and working individuals who are not classified in the hierarchical definition and working individuals who are not classified in the alternative definition. Sample restricted to individuals with non-missing alternative definition. Sample restricted to individuals with non-missing observations of working status, age, sex, and education across all waves of observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. the GHS, so results differ from figures focusing only on 2018/19. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 131 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 6.32. The share of both women and men working, especially in household agriculture, 6.5.2  A pandemic of inequality: COVID-19 increased after the 2016 oil-price recession is disproportionately affecting labor- Primary job type for the working-age population by sex, market outcomes for the poor and for 2010–19 women Share of working-age population, percent 100 90 26.9 Changes in working situations during the COVID-19 34.3 34.6 80 36.8 41.1 44.4 43.6 38.2 crisis differ across the consumption distribution. 70 13.5 The season-adjusted increase in working rates was 60 13.5 12.9 7.0 50 12.6 17.2 6.1 6.3 6.5 larger among the poorest households. Comparing 40 20.7 19.9 17.1 33.0 24.8 agriculture cycles before and during the COVID-19 31.4 29.2 30 crisis demonstrates this effect. Between July–September 2018 and January–February 2019, the share of people in 20 42.0 31.5 30.7 35.4 29.7 10 19.8 17.9 20.7 0 the bottom 40 percent of the consumption distribution 2010/11 2012/13 2015/16 2018/19 2010/11 2012/13 2015/16 2018/19 Men Women who were working dropped by 20.8 percentage points, J Household agriculture J Non-farm enterprise J Other (trainee or unclassified) while between September 2020 and February 2021, the J Wage work J Not working decline was just 5.2 percentage points (FIGURE 6.33). Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS For those in the top 60 percent of the consumption waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household distribution, the share of people who were working enterprises, in that order. Estimates averaged across post-planting and post- harvest visits. The “other” categories include trainees from the alternative dropped by a far more modest 10.1 percentage points hierarchical definition and working individuals who are not classified in the alternative definition. Sample restricted to individuals with non-missing between July–September 2018 and January–February observations of working status, age, sex, and education across all waves of the GHS, so results differ from figures focusing only on 2018/19. 2019, and by around 0.6 of a percentage point between September 2020 and February 2021. As such, the came at the expense of non-farm household enterprises, absolute magnitude of the seasonal contraction in the with the share of women working in non-farm household share of people working narrowed far more sharply enterprises dropping from 29.2 to 24.8 percent over among Nigerians in the bottom 40 percent of the the same period. The share of men who were working consumption distribution than among those in the rose from 65.4 to 73.1 percent between 2015/16 top 60 percent.165 These patterns may arise because and 2018/19, with the share engaged in household widespread price increases observed through the agriculture increasing from 35.4 to 42.0 percent.164 COVID-19 crisis (FIGURE 6.41 in Annex 6.3) could However, there was no analogous drop in the share of affect poorer households more, forcing members of men working in non-farm household enterprises. poorer households to work more in order to cope. Unlike the 2016 oil-price recession, the COVID-19 crisis affected the working status of women more than men. It appears that the elevated working rates observed in February 2021 were disproportionately 164 Similar gender patterns were observed, even more starkly, when focusing only on young people. The share of young women who were working rose from 34.9 to 45.7 percent between 2015/16 and 2018/19, with the share engaged in household agriculture rising from 14.4 to 23.4 percent. Over the same period, the share of young men who were working rose from 42.1 to 55.5 percent, with the share engaged in household agriculture rising from 28.5 to 37.1 percent. 165 Nevertheless, in relative terms, the seasonal contraction in the share of people working was actually larger among non-poor households. The seasonal contraction in the share of poor individuals who were working between September 2020 and February 2021 was about one quarter of the contraction between July–September 2018 and January–February 2019. However, the seasonal contraction in the share of non-poor individuals who were working between September 2020 and February 2021 was about one-tenth of the contraction between July–September 2018 and January–February 2019. 132 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 6.33. Poorer Nigerians increased their labor supply more during the COVID-19 crisis Working situation of the working-age population in the Working situation of the working-age population in the top bottom 40 percent of the consumption distribution, 2018–21 60 percent of the consumption distribution, 2018–21 Percent Percent 100 100 90 21.1 90 23.5 28.2 33.4 28.4 29.0 33.6 80 41.9 80 70 70 60 60 50 50 40 78.9 -20.8 40 76.5 -10.1 71.8 -5.2 66.6 71.6 -0.6 71.0 66.4 30 58.1 30 20 20 10 10 0 0 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) J Working J Not working J Working J Not working Source: 2018/19 GHS, NLPS, and World Bank estimates. Notes: The sample is a panel of individuals observed across the relevant 2018/19 GHS visits and NLPS rounds. FIGURE 6.34. Women increased their seasonally-adjusted working rates more than men as the COVID-19 crisis continued Working situation of working-age men, 2018–21 Working situation of working-age women, 2018–21 Percent Percent 100 100 90 17.2 21.7 90 29.9 25.9 28.0 34.7 34.7 80 80 42.3 70 70 60 60 50 50 40 82.8 -12.7 78.3 -4.2 40 70.1 74.1 72.0 -14.4 65.3 +0.0 65.3 30 30 57.7 20 20 10 10 0 0 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) J Working J Not working J Working J Not working Source: 2018/19 GHS, NLPS, and World Bank estimates. Notes: The sample is a panel of individuals observed across the relevant 2018/19 GHS visits and NLPS rounds. concentrated among women. The share of men who were 2016 oil-price recession (FIGURE 6.32). The relatively working decreased by 12.7 percentage points between larger labor supply response among women during the September–July 2018 and January–February 2019, and COVID-19 crisis is reminiscent of an “added worker by 4.2 percentage points between September 2020 and effect,” whereby households increase their overall labor February 2021 (FIGURE 6.34). The share of women market participation to cope with economic shocks. That who were working decreased by 14.3 percentage points this type of added worker effect was not observed in the between September–July 2018 and January–February 2016 oil-price recession marks an important difference 2019, prior to the COVID-19 crisis, but there was between the two crises. However, the data from 2018/19 virtually no decrease in women’s working rates between may have been collected too long after the oil-price September 2020 and February 2021. These gender recession first hit to capture these impacts fully. differences are even starker than those observed for the Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 133 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 In contrast to the 2016 oil-price recession, women 6.5.3  In some regions, girls and young were much more likely to enter non-farm-enterprise women have been less likely to return to work during the current crisis  (FIGURE 6.35). The education during the COVID-19 crisis figure shows the seasonal shifts in type of work for women and men for seasonal cycles before and during Higher female working rates could be linked to the COVID-19 crisis. Between July–September 2018 the declines in schooling rates among girls and and January–February 2019, the share of women young women in some parts of Nigeria during the engaged in non-farm household enterprises actually fell COVID-19 crisis. FIGURE 6.36 shows Dessy et al.’s by 6.1 percentage points, but between September 2020 (2021) estimates of the zone-specific gender difference and February 2021, the share increased by 7.7 percentage in return-to-school rates among those aged 5–18 after points. For men, by contrast, the share engaged in non- schools re-opened. While there is no overall gender farm enterprises increased by 13.1 percentage points difference in return-to-school rates, females in the North between July–September 2018 and January–February West zone were more likely to return to school. This is 2019 and also increased by 8.4 percentage points especially true for those aged 12–18 years. As discussed between September 2020 and February 2021. Thus, in Dessy et al. (2021), this could indicate that the in seasonally-adjusted terms, women’s participation increase in school-leaving among older girls is linked to in non-farm household enterprises has been elevated child marriage, as early female marriage is more prevalent during the COVID-19 crisis. This is consistent with in the North West zone. the larger shifts toward commerce and services seen for women (FIGURE 6.42 in Annex 6.3). Thus, overall, women have been driving much of the shift toward 6.5.4  Risks for Nigeria’s economic future non-farm household enterprises in commerce and - and a window to respond services witnessed during the COVID-19 crisis. Given the previous results showing the decline of income from These uneven effects have implications for Nigeria’s non-farm enterprises, this suggests that women are future growth prospects. Nigeria’s human capital entering even more precarious jobs. stock has suffered negative shocks from two economic FIGURE 6.35. Women have been entering non-farm household enterprises during the COVID-19 crisis Primary job type for working-age men, 2018–21 Primary job type for working-age women, 2018–21 Share of working-age men, percent Share of working-age women, percent 100 100 90 17.2 90 21.7 25.9 28.0 29.9 34.7 34.7 80 80 42.3 12.7 70 12.5 70 14.3 6.7 8.9 5.0 6.8 60 25.0 +13.1 60 7.3 50 28.3 +8.4 50 37.4 -6.1 40 38.1 36.7 40 36.2 +7.7 43.9 31.4 30 30 20 44.4 20 35.6 27.4 22.5 10 20.0 20.5 10 16.5 13.1 0 0 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) J Household agriculture J Non-farm enterprise J Trainee J Household agriculture J Non-farm enterprise J Trainee J Wage work J Not working J Wage work J Not working Source: 2018/19 GHS, NLPS, and World Bank estimates. Notes: Estimates focus on primary job, defined as the job in which the individual worked the most hours. The sample is a panel of individuals observed across the relevant 2018/19 GHS and NLPS rounds. 134 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 6.36. Return to schooling after COVID-19: divergences by gender, age, and zone shocks from these crises might lead poorer and more Gender gap in the relative return-to-school rates after the economically stressed households to encourage young start of the COVID-19 crisis, by age and zone women to head into early marriage, at the expense of Gender gap in relative return-to-school rates education, as a coping strategy. Girls and young women 0.25 0.20 who leave school earlier are in general at higher risk of 0.15 earlier fertility (Amin, Ahmed, et al. 2016, 2018). Thus, 0.10 economic crises could slow the fertility transition and 0.05 0 dilute future gains from economic growth. -0.05 -0.10 6.6  Taking action for good jobs: policy -0.15 -0.20 -0.25 options North Central North East North Central North West South East North East North West South West North Central North East South South East West South South South South West North South East South South South West Age 5–18 Age 5–11 Age 12–18 This section provides three broad areas of policy Source: Excerpted from Table 5 in Dessy et al. (2021), based on GHS and NLPS. guidance, based on the analysis presented above: Notes: This figure gives estimates of the gender gap in relative return-to- school rates after the COVID-19 crisis began. A positive value indicates that investing in human capital; reforms to boost job boys are relatively less likely than girls to return to school. A negative value indicates that girls are relatively less likely than boys to return to school. The 95 percent confidence intervals are included. The figure indicates that the creation; and helping enterprise grow. decrease in return to schooling is relatively larger among specific sub-groups (girls age 5–18 in the North West zone and boys age 12–18 in the South West zone). 6.6.1  Investing in human capital crises in close succession, with evidence of a decline in educational attainment in response to both crises. From Nigeria’s investment in its human capital has long the 2016 oil-price recession, the evidence suggests that been insufficient, and two successive crises may the drop in educational attainment was concentrated further impede progress. According to the 2020 among wealthier individuals with more resources. Human Capital Index, a child born in Nigeria that Meanwhile, from the latest data on rates of return year will grow up to achieve just 36.1 percent of the to school following the COVID-19 pandemic, the productivity she could have attained, if she had enjoyed decreases in return-to-school seem to be concentrated full health and education; this is lower than the averages among females in an early-marriage-prone region and for SSA and for all lower middle-income countries among males in the wealthier urban zone of Nigeria. (World Bank 2020). Nigeria has also lost about half a year in learning-adjusted years of schooling due to the Several mechanisms may now complicate Nigeria’s COVID-19 crisis (Azevedo, et al. 2020, UNESCO economic growth and structural transformation. 2021). These patterns are even more concerning, given First, an aggregate decrease in the stock of human capital the evidence presented above that households struggling will slow growth, as greater human capital increases to cope with income shocks have responded to recent productivity. Second, any uneven effects that induce economic crises by prioritizing work over education for greater inequality in the stock of human capital could young people. slow economic growth even further (Galor and Moav, 2004). Third, underinvestment in human capital may Underinvestment in human capital may prevent lead to lower education for women and girls, which— Nigeria from exploiting its demographic dividend when combined with an ongoing shortage of productive through two main channels: by limiting productivity jobs—could hinder a fertility transition by encouraging and by increasing fertility. Without tailored, high- earlier fertility. Specifically, the negative economic quality education, Nigeria’s workers may lack the skills Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 135 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 needed to prosper in the labor market, notwithstanding be wasted but may also discourage future generations the current lack of wage jobs. However, making the most from investing in human capital. Indeed, this note has of the country’s demographic dividend is not just about shown how the recent economic shocks that Nigerians matching good workers with good jobs. Nigeria also faced led to youth dropping out of school earlier. needs a fertility transition, so that the proceeds of growth and any good jobs created will be shared around among Reforms are needed to ensure that good jobs are fewer people. This is far less likely with children—and available for young Nigerians so that education especially girls—out of school. pays off. Structural transformation has proved slow and was even reversed by the 2016 oil-price recession, Reversing education losses suffered during the when the share of workers in agriculture increased. COVID-19 crisis presents the most immediate While the COVID-19 crisis instead appears to have priority. Schools were shut down across Nigeria during spurred additional engagement in non-farm enterprises 2020 (AllSchool 2020). Since remote learning methods in commerce and services, incomes from these jobs may have limited applicability in Nigeria, especially for appear to be precarious too. Among the key priorities to poorer households (Siwatu et al., 2020), recouping the support job creation will be promoting diversification learning lost during the COVID-19 crisis will require of the economy away from oil, which has represented safe and appropriate ways to bolster in-person schooling. more than 80 percent of Nigeria’s total exports every Nigerian households themselves favor adding more year since the 1970s. Broader macroeconomic reforms to hours to the school day, repeating the missed school exchange rate policy, trade, and fiscal policy—including period, and delivering lessons during the typical school redirecting spending toward infrastructure and pro-poor holidays (Siwatu et al., 2020). “Low tech” approaches social protection policies—may also support growth and that seek to engage parents and teachers—through help spark job creation.166 mobile phones, where appropriate—could also support learning given the ongoing uncertainty around whether schools will be able to stay open (Carvalho et al. 2020). 6.6.3  Helping enterprises grow Monitoring progress on schooling during the upcoming school year will be essential to ensure that losses incurred Waiting for wage jobs to be widely available will when schools were closed are effectively regained. take a long time, so alleviating constraints on growth for Nigeria’s small enterprises will be crucial in the short and medium term. Even with reforms, it may 6.6.2  Reforms to boost job creation take years or decades before wage jobs—especially those with job security and in-work benefits—are widely While essential, human capital investment alone is available in Nigeria: “informal will be normal” (Fox not enough. Prior to the COVID-19 crisis, Nigerians and Gandhi 2021). Policies to support farm and non- with tertiary education were by far the most likely farm enterprises will therefore be essential: these could to hold wage jobs. However, even tertiary education provide employment not only for their owners but did not guarantee such a job, while returns to primary also for employees from other households if they can and secondary education were even lower in terms of become more productive and grow. For farms, research boosting people’s chances of securing a wage job; most that develops more resilient and productive crop and Nigerians engaged in farm and non-farm enterprise livestock varieties, as well as public investment to activities, offering less chance of escaping poverty. This support storage, transport, and market access could not only means that any investments in education could help boost agricultural productivity (Beegle and 166 See World Bank (2021) for further details on the macroeconomic reform agenda. 136 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE Christiaensen 2019). This is especially important, given 6.6.4  Getting the most from Nigeria’s current low levels of commercialization of agriculture demographic dividend in Nigeria and lack of access to key inputs (Oseni and Winters 2009, FAO 2018, Ecker and Hatzenbuehler Policy action in the three areas described will be 2021). For non-farm enterprises, recent analysis suggests critical in lifting Nigeria to a demographic-dividend that cash grants—administered through a national success story. Nigeria’s young population embodies the business competition—have large positive effects on nation’s promise. To deliver on that promise requires firms’ survival, profitability, and firms’ size (McKenzie, bold action now. The evidence distilled in this brief 2017). As such, policies that loosen firms’ credit provides directions for policy-making to accelerate skills constraints would improve firm productivity, profits, and investment and job creation for Nigeria’s youth. The job creation, even among small enterprises. This could approaches described have the power to bolster human complement policies that build the infrastructure and capital, boost quality job creation, and improve returns markets on which small businesses rely (Filmer and Fox to education, notably in terms of female labor force 2014). participation. These measures will help advance both Nigeria’s economic transformation and the fertility New data will help policy makers understand how transition that the country needs. Two economic to boost firm growth and invigorate the demand shocks in rapid succession have tested the nation’s side of the labor market. In particular, Nigeria’s endurance. But Nigeria’s leaders can harness the crisis establishment census and sample surveys will provide as an opportunity to drive new gains in human capital detailed information on the activities in which Nigerian and labor-market transformation. Ensuring good jobs firms engage and the constraints on their growth. This, for youth will enable Nigeria to seize the demographic in turn, may help design initiatives to support firms and dividend of its young population and lay strong create more productive jobs. foundations for future inclusive growth. The labor data agenda could also benefit from more regularity and a different focus for Nigeria’s labor force survey. In recent years, the main analysis stemming from Nigeria’s labor force survey has typically focused on measuring unemployment; the share of the labor force that is not working but is actively searching and available for work. However, in countries such as Nigeria, where wage jobs are scarce and social protection is limited, unemployment may not be the best metric to ascertain the state of the labor market. As this technical note demonstrates, information on the job types and the sectors in which Nigerians engage, as well as other markers of job quality, provide policy makers with clearer guidance. This type of detailed information is already collected in Nigeria’s labor force survey, so it just remains to ensure that such data are gathered regularly and that these important indicators are analyzed and widely disseminated. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 137 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Annex 6.1  Definitions and data The working share, or the employed, are those who sources reported, in the relevant survey, having worked for pay or for profit for at least one hour in the previous week. Wage workers are those who work for someone else in exchange for a salary, daily wage, or “per-task” pay. Annex 6.1.1  What is a job in Nigeria? To be self-employed is to work for oneself, making When discussing jobs, this report directly adopts the income from the profits of one’s activity. Since the definitions used in a previous report studying Nigeria’s distinction can be blurred in a household between self- labor market (World Bank 2015). employment and unpaid, contributing family workers, the report considers as self-employed all workers A job is defined here as a work activity that is reporting to be employers, own-account, or contributing remunerated in cash or in kind, and does not violate family workers in a household enterprise. human rights (World Bank 2012). The definition includes labor activities that generate income for the Unemployment is defined according to the approach household, even if income cannot be assigned specifically established by the ILO and includes those who to individual household members, such as for household do not hold a job but are actively looking for one. farming or household nonfarm enterprises. It includes Unemployment rates are the share of unemployed goods produced for final consumption of the household people in the active population. The ILO’s definition (food from the family plot, for example), but excludes of unemployment is widely seen as problematic in services consumed by the household itself (such as developing country settings—where access to social looking after children, cooking, fetching water, and so protection is low—in revealing the share of people on). It does not include employment that goes against who are not working but want to work. It is seen as fundamental rights (ILO 1998). Forced labor, or child more applicable to high-income settings where the vast labor, is not a job. majority of work entails wage/salaried jobs for which active search is necessary. A productive job is a broad term used to indicate a higher “quality” job with a greater capacity for The inactive are those who do not work and who are not productivity and higher earnings. Productivity generally looking for work. refers to the value-added each worker generates. From the perspective of poverty reduction, productive jobs can be considered employment opportunities that generate Annex 6.1.2  Informal work in Nigeria income to bring people out of poverty and contribute to productivity growth in the economy. In general, “informal” work is work that is neither taxed nor monitored or regulated by any form of government, The working-age population encompasses the adult especially in terms of labor law regulating employment population between 15 and 64 years of age. relationships. More precise definitions of informal work have been given by the ILO and other organizations The youth refers to those aged between 15 and 29 years. (ILO 2017). Such organizations typically define informal employment to include: own-account workers The labor force includes the employed and unemployed. and employers in their own informal-sector enterprises; contributing family workers; members of informal 138 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE producers’ cooperatives; and employees holding informal July and September, and a “post-harvest” visit was jobs. carried out, usually between January and February of the following calendar year. The labor market indicators In the context of Nigeria, informal workers correspond for each wave presented in this brief often correspond to to the self-employed (own-account workers, unpaid averages across the post-planting and post-harvest visits. family workers, or employers) who work in enterprises, whether in agriculture or non-agriculture, that are not The GHS-Panel data are representative at the national, registered with the authorities. Since subsistence farming zone, and urban-rural level. is prevalent, and most non-farm household enterprises are home-based, small-scale activities, informality tends to result from the small-scale nature of the activities Annex 6.1.4  Background and description rather than from an active choice to avoid working of the Nigeria COVID-19 National within the legal framework. Around 96 percent of Longitudinal Phone Survey (NLPS) the self-employed working on their own farm and 84 percent of the self-employed in the non-farm sector are The Nigeria COVID-19 National Longitudinal Phone not registered with the authorities (World Bank 2015). Survey (NLPS) is a monthly survey implemented by NBS in collaboration with the World Bank, which was This definition of informal work also closely coincides initiated in early 2020 to monitor the impacts of the with the characterization of precarious work presented in COVID-19 crisis. The survey is conducted over the BOX 6.2. phone with a subset of respondents from the GHS: this sampling approach makes it possible to trace the same individuals and households before and during the Annex 6.1.3  Background and description COVID-19 crisis. The survey covers important topics of the Nigeria General Household Survey including knowledge and concerns about the pandemic, (GHS) Panel access to food and other basic needs, and crucially the labor market. Nigeria’s General Household Survey (GHS) Panel, collected by Nigeria’s National Bureau of Statistics Since the NLPS is drawn from a subset of individuals (NBS) in collaboration with the World Bank, is one on and households captured by the GHS, it is possible the main data sources used for this brief. The GHS-Panel to construct sample weights that produce nationally- contains core labor indicators that are generally captured representative estimates of key labor market indicators. in a way consistent with international standards. Excluding households with no access to a mobile phone or who could not be interviewed despite several call The GHS-Panel consists of four waves collected in attempts could introduce bias. However, drawing on the 2010/2011, 2012/2013, 2015/2016, and 2018/19. extensive set of variables available in the 2018/19 GHS The data are longitudinal, making it possible to track alongside publicly-available phone survey weights makes the labor market outcomes of the same individuals and it possible to correct this potential source of bias. households over time. To account for the fact that agricultural employment in Nigeria is highly seasonal, GHS data were collected during two visits to the same household in each wave. A “post-planting” visit was carried out, usually between Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 139 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Annex 6.2  Estimating the impact of the GHS before the impact of the oil recession could of the 2016 oil recession on be measured. Thus, for the outcomes modeled here— working and schooling for young secondary educational attainment and active labor market status of 20–25-year-olds—the first three waves of Nigerians the GHS are used to estimate the model. Active labor market status refers to both those who are working and those who are available and searching for work. Demographic, regional, or time trends unrelated to the oil recession might also influence the large changes in This model is then used to predict the counterfactual schooling rates and labor market outcomes for Nigerians probability of attaining secondary education or being between 2015 and 2019. Depending on the nature of active in the labor market—that is, the probability of these other “confounding” factors, the actual impact each outcome if the oil recession had not occurred— of the oil recession might be larger or smaller than the for each individual in the relevant 2018/19 sample. impact that can be inferred from simply inspecting The “treatment effect” for each individual is simply the time trends and comparing the 2015/16 GHS with the difference between the actual realized outcome and the 2018/19 GHS. predicted outcome from the counterfactual model. Then “Average Treatment Effects” (ATEs) are calculated by Constructing a more rigorous “counterfactual”—that is, averaging individual treatment effects across the relevant an alternative scenario in which the oil recession never sample. The standard errors of the ATEs are calculated occurred—can address these concerns. Comparing using bootstrap simulations. youth education and labor market outcomes in this counterfactual with what actually happened can deliver To model the counterfactual for each outcome, a set a more robust estimate of the impact of the oil recession. of “proximate causal” factors are chosen that are both This annex develops a detailed counterfactual of the available in the data and thought to be important for education and labor market outcomes of 20–25-year- that outcome. The proximate causal factors of gender, olds that accounts for possible shifts in individual-level zone, urban-rural, and father’s education are included characteristics that might also explain the sudden change in the model. Zone and urban-rural are also interacted in outcomes before and after the oil recession. with time period, to help control for regional shocks in climate and conflict that might further influence the This approach attempts to control for any potential labor and educational outcomes of interest. A linear time differences in observable individual characteristics of the trend is included to reflect secular trends in the outcome new cohorts—that is, those before and those after the over time. recession hit—such as differences in family resources or regional shocks unrelated to the oil recession (such as For this modeling exercise, causal factors are added climate or conflict shocks). In so doing, the approach sequentially in a simple linear model (with no also controls for other unobserved potential confounders interactions) and 10-fold cross-validation is used to that are closely correlated with these observable evaluate the predictive performance of the model. characteristics. A model is considered “better” at predicting “out of sample” if the variance of the R-squared statistics is For the treatment effects presented below, counterfactual lower, holding constant the mean of the R-squared. outcomes for the relevant sample of individuals in Similarly, a model is preferred if the mean R-squared is 2018/19 are created by estimating a model for the higher, holding constant the variance of the R-squared outcome of interest using information from the waves 140 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE statistics. For each outcome, the “best” model, using secondary educational attainment. The sample is people these criteria, is highlighted in gray in the tables below. aged 20–25 years, as almost all Nigerians that complete secondary education do so by age. Column 5 shows Results from a modified LASSO approach are also the ATE using the predictions from the LPM, while included to see how the estimates might change if the Column 7 shows the ATE using predictions from the covariates are chosen simply to maximize prediction LPM-LDM. accuracy. In this exercise, the LASSO is implemented on the full set of interactions of the causal factors These results suggest that the oil recession decreased chosen from the “best” model described above, and the share of 20–25-year-old Nigerians who had the mean and standard deviation of the generated attained secondary education in 2018/19 by around pseudo R-squared are reported. In general, the LASSO 8 percentage points. This is close to the change in estimates suffer from weaker out of sample prediction secondary educational attainment observed by simply ability. In both tables below, the LASSO model has both inspecting the time trend and comparing the 2015/16 greater prediction ability but weaker stability of out of and 2018/19 GHS data. Models 4 and 6 are selected sample fit, illustrating the usual bias-variance trade off as the “best” models through comparing the mean and prediction models. standard deviation of the R-squared calculations from the 10-fold cross validations (Columns 9 and 10). To examine whether the estimates are robust to However, comparing the ATEs across all the models different functional form assumptions, the predictions reported in Columns 5 and 7 shows that the estimates are calculated using both a linear probability model do not vary widely, ranging from 6 to 8 percentage (LPM) and a linear discriminant model (LPM-LDM) points. The LASSO model—which includes a full set of transformation that constrains predictions to be within interactions of all the variables present in Model 6—also the range of 0 to 1. The package in Stata produces similar estimates of the ATE. The stability of was used to calculate the LPM-LDM transformation. these estimates provides some reassurance that omitted variable bias is not substantially affecting the estimates TABLE 6.1 reports the estimated treatment effects of (Altonji, Elder and Taber 2005). the different models described above for the outcome of TABLE 6.1. Impact of the 2016 oil recession on secondary educational attainment of 20–25-year-olds in 2018/19, Average Treatment Effects (ATEs) from counterfactual model predictions (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) LPM LPM-LDM KFV R2 KFV R2 Model Model Covariates Rsq AdjRsq ATE SE ATE SE Mn SD 1 t 0.219 0.215 -0.072 0.010 -0.073 0.010 0.181 0.023 2 t × Urb-Rur 0.255 0.251 -0.060 0.009 -0.061 0.009 0.217 0.026 3 t × Urb-Rur × Gender 0.281 0.276 -0.062 0.009 -0.062 0.009 0.237 0.036 t × Urb-Rur × Gender × 4 0.278 0.273 -0.076 0.009 -0.081 0.009 0.240 0.019 FatherEduc t × Urb-Rur × Gender × 5 0.280 0.274 -0.076 0.010 -0.079 0.010 0.239 0.023 FatherEduc; t × Zone t × Urb-Rur × Gender × 6 0.294 0.287 -0.074 0.009 -0.079 0.009 0.243 0.025 FatherEduc; t × Zone × Urb/Rur LASSO 61 covariates (not shown) — 0.292 -0.081 0.010 -0.077 0.010 0.273 0.180 Source: GHS and World Bank estimates. Notes: t is a linear time trend. Columns 5 and 6 give ATE estimates and their standard errors for a linear probability model; Columns 7 and 8 give ATE estimates and their standard errors for linear discriminant model transformation. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 141 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 TABLE 6.2. Impact of the 2016 oil recession on active labor market status of 20–25-year-olds in 2018/19 post-planting Season, Average Treatment Effects (ATEs) from counterfactual model predictions (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) LPM LPM-LDM KFV R2 KFV R2 Model Model Covariates Rsq AdjRsq ATE SE ATE SE Mn SD 1 t 0.0333 0.0311 0.2355 0.0103 0.2182 0.0108 0.0297 0.0133 2 t; Zone 0.0550 0.0522 0.2222 0.0095 0.1985 0.0098 0.0502 0.0130 3 t; Zone × Urb-Rur 0.0531 0.0496 0.2190 0.0101 0.1986 0.0109 0.0507 0.0158 4 t; Zone × gender 0.0624 0.0590 0.2130 0.0097 0.1910 0.0100 0.0562 0.0164 5 t; Zone × HH Size 0.0774 0.0714 0.2040 0.0193 0.2000 0.0193 0.0616 0.0183 LASSO 63 covariates (not shown) — 0.1191 0.1940 0.0174 0.1980 0.0174 0.0983 0.2171 Source: GHS and World Bank estimates. Notes: t is a linear time trend. Columns 5 and 6 give ATE estimates and their standard errors for a linear probability model; Columns 7 and 8 give ATE estimates and their standard errors for linear discriminant model transformation. TABLE 6.2 reports the results of a similar exercise for the outcome of active labor market status of 20–25-year- olds. For parsimony, the models reported in this table only use the post-planting visit of each GHS wave. Once again, Column 5 shows the ATE using the predictions from the LPM, while Column 7 shows the ATE using predictions from the LPM-LDM. The results suggest that the oil recession increased the likelihood that 20–25-year-old Nigerians were active in the labor market in 2018/19 by about 20 percentage points. Model 5 is selected as the “best” model because of its high mean R-squared. However, once again, the estimates are all relatively stable, ranging from 19 to 24 percentage points across the LPM and LPM-LDM approaches. These results are consistent with the decline in secondary educational attainment; an individual aged 20–25 years who is not in school is likely to be working or looking for work. While not reported in TABLE 6.2, conducting a similar exercise using the post-harvest visit for each GHS suggests that the oil recession increased the likelihood that 20–25-year-olds were active in the labor market in 2018/19 by about 6 percentage points. 142 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE Annex 6.3  Additional figures FIGURE 6.37. Nigerian population, U.S. Census FIGURE 6.38. Number of job types per individual, International Bureau estimates 2018/19 Nigeria population estimates, 2000–21 Number of jobs for different population groups, 2018/19 Millions of people Share of the population, percent 40 100 90 16.9 19.4 35 23.7 28.3 30 80 70 25 37.0 60 43.9 20 44.8 50 45.8 15 40 10 30 45.7 5 20 36.3 30.4 24.2 0 10 + 10 9 20 9 30 9 40 9 50 9 60 9 70 9 9 4 15 4 25 4 35 4 45 4 55 4 65 4 75 4 80 0 5– –1 –2 –3 –4 –5 –6 –7 0– –1 –2 –3 –4 –5 –6 –7 15–64 15–29 Men (15–64) Women (15–64) Age group, years J 2000 J 2010 J 2021 J 0 J 1 J 2 J 3 Source: U.S. Census Bureau, International Database and World Bank Source: 2018/19 GHS and World Bank estimates. estimates. Notes: Estimates averaged across post-planting and post-harvest visits. Notes: 2021 figures are estimates calculated by the U.S. Census. See U.S. Sample for this figure (and all figures with only 2018/19 data) is limited to Census Bureau International database for details. those in the specified age range with non-missing information on sex, age, and education. FIGURE 6.39. Average hours per week, by primary FIGURE 6.40. Educational attainment, people aged job type and number of job types 20–25, excluding North East and North Central zones Average hours worked per week among workers aged Educational attainment among 20–25-year-olds excluding 15–64 by primary job type and number of jobs, 2018/19 the North East and North Central zones, 2010–19 Mean hours worked per week 94,0 100 90 2010/11 23.4 54.4 22.2 80 70 60,6 60,0 59,4 55,3 60 2012/13 23.4 59.0 17.5 48,2 47,6 46,2 45,6 42,6 50 41,7 41,1 40,8 39,0 38,0 35,5 33,1 40 31,0 28,9 2015/16 27,9 20.6 62.8 16.5 25,1 24,4 30 17,6 20 10 2018/19 22.0 55.8 22.2 0 1 2 3 1 2 3 1 2 3 1 2 3 Household Non-farm Wage work Wage work agriculture enterprises (all) (with benefits) 0 20 40 60 80 100 Share of 20–25-year-olds, percent J Post planting J Post harvest J Primary J Secondary or higher J None or less than primary Source: 2018/19 GHS and World Bank estimates. Source: GHS and World Bank estimates. Notes: Wage work with benefits is defined here as wage work jobs that offer Notes: “None or less than primary” refers to individuals who have not fully a pension or health insurance. Sample for this figure (and all figures with only attained primary education. “Primary” refers to attainment of at least full 2018/19 data) is limited to those in the specified age range with non-missing primary education but not full secondary education. “Secondary or higher” information on sex, age, and education refers to attainment of senior secondary completion or higher. Chart focuses on those aged 20–25 years because almost all Nigerians who complete secondary education do so before age 20. Estimates averaged across post- planting and post-harvest visits. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 143 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 6.41. Prevalence of price shocks experienced by Nigerian households Households' experience of price shocks, 2017–20 Share of households experiencing each shock, percent 100 90.1 90 85.4 82.0 80 70 66.9 62.0 60 50 46.0 40 30 21.6 18.1 20 15.8 16.0 10 7.9 2.3 0 Jan 2017 to Mid-March to Apr/May to Jul to Dec Jan 2019 Apr/May 2020 Jul 2020 2020 J Increase in price of farming/business inputs J Fall in the price of farming/business output J Increase in price of major food items consumed Source: GHS, NLPS, and World Bank estimates. FIGURE 6.42. Shift in the share of people engaged in different sectors before and during the COVID-19 crisis, by gender Primary sector of work for working-age men, 2018–21 Primary sector of work for working-age women, 2018–21 Share of working-age women, percent Share of working-age men, percent 100 100 90 90 17.2 +12.7 21.7 +4.2 28.0 +14.4 29.9 25.9 34.7 +0.0 34.7 80 42.3 80 15.5 70 70 12.7 16.0 18.4 11.0 16.2 9.1 60 -5.8 12.4 +1.8 14.3 60 +7.4 12.6 +3.3 9.8 50 50 10.6 16.5 17.4 +2.4 14.2 40 27.6 +6.1 40 19.7 33.8 14.5 8.1 15.5 30 30 0.6 45.7 -21.6 46.7 -19.5 20 7.5 20 28.2 1.8 24.6 24.1 27.2 10 17.8 15.5 10 0 0 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Jul–Sep 2018 Jan–Feb 2019 Sep 2020 Feb 2021 Before COVID-19 During COVID-19 Before COVID-19 During COVID-19 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) 2018/19 season (GHS Wave 4) 2020/21 season (NLPS) J Agriculture J Industry J Commerce J Agriculture J Industry J Commerce J Services J Not working J Services J Not working Source: 2018/19 GHS, NLPS, and World Bank estimates. Notes: Estimates focus on primary job, defined as the job in which the individual worked the most hours. The sample is a panel of individuals observed across the relevant 2018/19 GHS visits and NLPS rounds with non-missing information on sector. In this figure, industry includes mining, manufacturing, utilities, construction, postal/transport industries and professional, while services include public administration, education, health, personal services, and business services. 144 Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 TECHNICAL NOTES  |  CHARTING A NEW COURSE Annex 6.4  Additional tables TABLE 6.3. Transition matrix for job type, post-planting visit, 2010/11 to 2012/13 2012/13 Non-farm Household Not working Wage work household Total agriculture enterprise Not working 22.5 1.8 3.6 4.2 32.2 Wage work 1.4 5.9 0.8 0.9 9.0 Household agriculture 5.6 0.8 21.6 3.6 31.6 2010/11 Non-farm household 5.3 0.8 2.4 18.7 27.2 enterprise Total 34.8 9.3 28.4 27.4 100.0 Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Trainees and working individuals who cannot be classified by the hierarchical definition of primary job are excluded. Sample focuses on those individuals with non-missing job type in 2010/11 and 2012/13. TABLE 6.4. Transition matrix for job type, post-planting visit, 2012/13 to 2015/16 2015/16 Non-farm Household Not working Wage work household Total agriculture enterprise Not working 21.9 1.9 6.1 6.2 36.1 Wage work 1.3 6.1 0.7 1.1 9.1 Household agriculture 3.1 0.8 23.0 1.5 28.3 2012/13 Non-farm household 3.9 1.1 5.4 16.1 26.5 enterprise Total 30.2 9.8 35.1 24.9 100.0 Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Trainees and working individuals who cannot be classified by the hierarchical definition of primary job are excluded. Sample focuses on those individuals with non-missing job type in 2012/13 and 2015/16. TABLE 6.5. Transition matrix for job type, post-planting visit, 2015/16 to 2018/19 2018/19 Non-farm Household Not working Wage work household Total agriculture enterprise Not working 16.1 1.7 6.7 6.2 30.7 Wage work 1.4 7.0 1.2 1.0 10.6 Household agriculture 3.2 1.5 25.4 2.1 32.3 2015/16 Non-farm household 5.0 1.6 6.2 13.6 26.4 enterprise Total 25.7 11.8 39.5 22.9 100.0 Source: GHS and World Bank estimates. Notes: Since information on hours worked is not available in earlier GHS waves, an alternative hierarchical definition of the primary job is used, which prioritizes wage work, then household agriculture, then non-farm household enterprises, in that order. Trainees and working individuals who cannot be classified by the hierarchical definition of primary job are excluded. Sample focuses on those individuals with non-missing job type in 2015/16 and 2018/19. 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Global Monitoring of School Closures Caused by the COVID-19 Pandemic. Methodological Note, Paris: UNESCO. World Bank. 2020. Human Capital Index 2020: Nigeria Country Brief. Washington, DC: World Bank. World Bank. 2015. More, and More Productive, Jobs for Nigeria: A Profile of Work and Workers. Washington, DC: World Bank. World Bank. 2020. Rising to the Challenge: Nigeria's COVID Response. Washington, DC: World Bank. World Bank. 2012. World Development Report 2013: Jobs. Washington, DC: World Bank. Note 6: Good Jobs for a New Generation: Delivering Quality Jobs for Young Nigerians After COVID-19 147 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added Authors: Elliot Mghenyi and Chidozie Anyiro TECHNICAL NOTES  |  CHARTING A NEW COURSE Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added Summary: The agribusiness sector is central to the 7.1  Agribusiness for Economic diversification of Nigeria’s economy. Agribusiness, Diversification and Jobs which includes all farms and firms involved in producing, harvesting, packing, processing, preserving, The agribusiness sector is central to diversification of distributing, marketing, and disposing of food and Nigeria’s economy. Nigeria’s oil dependence limits the non-food agricultural products, has the potential to ability of the economy to absorb external shocks, and build an economy that can generate inclusive growth, generates growth that is non-inclusive and with little create jobs, and reduce poverty. Policy reforms are impact on job creation (FIGURE 7.1). Diversification of needed to improve the quality (and quantity) of various the economy from oil to non-oil productive sectors, such public goods and services, and to catalyze private as agribusiness, can build an economy that can generate sector investments in agricultural value chains—input inclusive growth, create jobs, and reduce poverty. supply, primary production, post-harvest management, Agribusiness includes all farms and firms involved in trading, and logistics, etc. There is need for coordinated producing, harvesting, packing, processing, preserving, investments to reduce fragmentation and establish distributing, marketing, and disposing of food and non- stronger linkages between the pre-upstream, upstream, food agricultural products. These activities could be and downstream segments. This fragmentation has led to classified into the following categories: agriculture,167 the prevalence of spot-market transactions where farmers processing,168 trade and transport,169 food services,170 look for buyers after producing a commodity, as opposed hotels,171 and inputs.172 The agribusiness sector features to farmers coordinating production decisions on quality prominently in policy dialog around diversification and quantity with buyers. While trade restrictions have for several reasons. First, the largest segment of generally increased domestic production, they have had agribusiness—agriculture173—has been the sector most a limited impact on long-term competitiveness, which resilient to economic shocks174 (FIGURE 7.2). The relies on productivity growth and improved quality. resilience of agriculture not only protects the livelihoods of the poor and vulnerable during tough economic times, but also provides a foundation for recovery of off-farm agribusiness segments, such as processing, trade and transportation, food services, etc. Second, the agribusiness sector has enormous unexploited potential to drive inclusive recovery and create more and better jobs (FIGURE 7.3). 167 The processing segment includes the part of the manufacturing sector GDP that involves processing, value addition and preservation of food and non-food agricultural products. 168 The agriculture segment of agribusiness includes all of the classical agriculture sector GDP—the primary production of all crops, livestock, forestry, and fishing. 169 The trade and transport segment includes the part of the services sector GDP that entails transportation, storage, logistics and trading for agricultural commodities and products between farms, firms, and final consumers. 170 The food services segment is the part of the classical services sector GDP that involves the preparation and sale of food outside the home. 171 The hotels segment includes the part of the hotels and accommodation GDP that is associated with food. 172 The inputs segment includes all GDP generated during domestic production of the inputs used by farmers and processors, excluding the inputs produced by the above five segments. 173 Agriculture accounts for about 61 percent of agribusiness GDP. 174 Agriculture was the only sector spared from negative growth during the 2016 oil-price recession and the sector least affected by the COVID-19 crisis. Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 149 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Agribusiness provides perhaps the best opportunities forward. During this period, the off-farm agribusiness to drive inclusive recovery from the 2020 recession sector outperformed the overall economy in GDP while generating more and better jobs. This conclusion growth, job creation and labor productivity growth. In is based on analysis of the growth, jobs, and labor particular, GDP in the off-farm agribusiness segments productivity outcomes during 2009–18 (FIGURE 7.4). grew on average by 5.3 percent annually compared with The outcomes of this decade are highly instructive, 3.7 percent economy-wide, jobs in off-farm agribusiness as this period was marked by pre-recession volatility, grew on average by 3.5 percent annually compared with the oil-price recession of 2016, and post-recession 2.5 percent economy-wide and labor productivity (GDP recovery—similar to the current economic situation per worker) in off-farm agribusiness grew on average and the near-term challenges facing Nigeria going by 1.8 percent annually compared with 1.2 percent economy-wide wide. Similarly, primary agriculture FIGURE 7.1. More than a decade of strong outperformed the overall economy in terms of GDP economic growth (2000–14) did not reduce the unemployment rate growth (4.3 vs 3.7 percent) and the creation of better jobs as labor productivity grew by 2.8 percent compared GDP growth and crude oil prices Percent US$ per barrel with 1.2 percent economy-wide average. The processing 16 100 segment and primary agriculture led all agribusiness 14 90 segments in the creation of better jobs. 12 80 10 70 8 60 Notwithstanding the relatively solid historical 6 50 performance, the potential of the agribusiness 4 40 sector to drive inclusive recovery remains untapped. 2 30 Unlocking the potential will require addressing several 0 20 -2 10 critical policy reforms and investment priorities. -4 0 Policy reforms are needed to improve the quality (and 20 0 20 03 2009 20 0 20 13 2019 Q 20 20 8 20 11 20 8 21 2001 20 2 20 2 20 6 20 6 20 4 20 4 2005 20 5 2007 2017 quantity) of various public goods and services, and 0 1 0 1 0 1 0 1 0 1 1 20 1- J Crude oil price (average, rhs) ▬ GDP growth ▬ Unemployment rate to catalyze private sector investments in agricultural Source: Mghenyi, E. et al., 2021. FIGURE 7.2. Agriculture is the most resilient FIGURE 7.3. Nigeria’s agribusiness segments sector, protecting livelihoods and jobs during grew faster and created more and better jobs than tough economic times the overall economy did, 2009–18 Sectoral GDP growth GDP growth, employment growth and GDP per worker growth Percent Percent 25 10 9 20 8 7 15 6 5 10 4 3 5 2 1 0 0 re s s ic od ng yl y rt om ta Bu Bu pl es po tu -5 rv fo on To si up ul Ag Ag es ns se nd ric ts oc tra rm a ag pu ec Pr s -10 fa d el In y an ff- ar ot O 20 0 20 3 20 9 10 20 3 20 9 Q 20 01 20 8 20 1 20 8 21 20 2 20 2 20 6 20 6 20 4 20 4 H im 20 5 20 5 07 17 e 1 0 0 0 1 1 0 1 0 1 0 1 0 1 0 1 ad 20 20 20 20 1- 20 Pr Tr ▬ Agriculture ▬ Manufacturing ▬ Industry ▬ Services J GDP J Employment J GDP per worker Source: Mghenyi, E. et al., 2021. Source: Mghenyi, E. et al., 2021. 150 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE value chains—input supply, primary production, post- rising temperatures and lower rainfall are most acutely harvest management, trading, and logistics, etc. A manifested. Persistent water shortages will continue to major problem in agricultural value chains is the lack exacerbate land degradation, desertification, and habitat of coordination between pre-upstream input supply, loss. Meanwhile, the South will increasingly experience upstream primary production, and downstream post- unpredictable rainfall patterns, shorter cropping season, harvest management, value addition, trading, etc. floods, leaching, and decreased soil fertility. Seasonal There is a need for coordinated investments to reduce variability in rainfall has affected groundwater recharge fragmentation and establish stronger linkages between and the availability of surface water for irrigation and the pre-upstream, upstream, and downstream segments. other economic activities. Climate-smart strategies to Overall, a policy reforms and investments strategy for adapt agriculture to these effects are well-defined and agribusiness should aim at: cost far less than inaction. For SSA as a whole, the cost of inaction on climate adaptation of agriculture and food • Raising agricultural productivity in a sustainable systems is about US$201 billion annually compared with manner by accelerating a whole range of climate the US$15 billion annual cost of adaptation (Vermeulen adaptation strategies that build resilience to et al., 2021). agroclimatic shocks. Increased agriculture FIGURE 7.4. The average Nigerian farmer is a productivity will reduce costs to downstream off-farm smallholder who relies on rain-fed agriculture with agribusiness segments and enhance food security. little irrigation • Increasing smallholder farmers’ access to credit for TFP index in agriculture 2005=100 long-term investments and short-term working 120 capital, including through digital technologies and effective tools for price risk management. 110 • Effective coordination of investments in agribusiness value chains using approaches that co-locate 100 investments with critical infrastructure. 90 • Conducive macroeconomic, trade and sectoral policies. 80 70 09 10 13 19 20 08 11 18 06 12 16 14 05 15 07 17 7.2  Raising agriculture productivity 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ▬ NGA ▬ GHA ▬ ETH ▬ ZAF ▬ VNM … LIC … LMIC … UMIC sustainably by accelerating the Source: International Agricultural Productivity database (U.S. Department of development and dissemination of Agriculture Economic Research Service) accessed December 2020, https:// www.ers.usda.gov/data-products/international-agricultural-productivity/. adaptation strategies that build resilience to agroclimatic shocks Perhaps the foremost climate-smart action involves research and extension to develop and disseminate Agriculture productivity has barely changed in improved technologies (crop varieties, livestock Nigeria for decades  (FIGURE 7.4). The problem breeds, management practices, etc.) that are more of persisting low productivity is being compounded productive and resilient to agroclimatic changes. The by the effects of climate change, which include heat availability and proper adoption of climate-smart stress, droughts, shorter rainy seasons, and increased agricultural technologies would enable technical change frequency and intensity of heavy rainfall events. (farmers reaching a new production frontier) and Climate change impacts are being felt strongly in the technical efficiency change (progress toward existing Northern parts of the country where the effects of production frontier). Nigeria needs to invest more in Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 151 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 agricultural R&D and farmer extension and advisory Policy reforms in the agriculture enabling services. Recent data show that Nigeria’s investment in environment are critical to complement the climate- agricultural research as a share of agricultural GDP fell smart strategies. In particular, reforms on seed from an already low 0.39 percent in 2008 to 0.22 percent development and fertilizer quality control are critical to in 2017 (Beintema et al., 2017). In comparison, the increase the supply of these inputs and enforce quality share in Ghana is 0.99 percent and in South Africa it is standards for certified and truthfully labeled seed in 2.79 percent the market. Although the regulatory environment for these inputs has improved since the passage of the Climate risk information and risk management National Agricultural Seed Council Act 2019 and the services can help farmers and other actors take actions Fertilizer Quality (Control) Act 2019, there is much to prepare for seasonal weather variability and longer- unfinished business in the implementation of these term climate trends, including adjusting the timing of reforms. For example, the full implementation of the land preparation and planting, and selecting varieties National Seed Council Act 2019 would recognize and with shorter maturity periods. The key climate protect intellectual property rights in seed development, information services include seasonal weather forecasts catalyze private sector investment in seed development for farmers and early warning systems that can help and multiplication, and enforce seed quality standards anticipate and manage natural disasters, pest outbreaks and appropriate labeling. The key reforms actions for and yield failures. Other climate-smart adaptation fertilizer quality control and seed development and strategies include: (i) sustainable water management at quality control are summarized in the section titled “Key farm and catchment levels through efficient irrigation Policy Options”. systems; (ii) restoration of degraded landscapes and sustainable land and soil management to improve the The weak regulatory environment has resulted to productive capacity of land; (iii) improvements in inadequate supplies of quality seeds and fertilizers, livestock systems such as transitioning from pastoral leading to low and imbalanced use of these inputs by systems that are notorious for poor environmental the farmers. For example, recent data indicate that there management toward intensive systems with better is imbalanced use of fertilizer and improved seeds across feeding to reduce emissions and improved breeding Nigeria except in the North Central. The imbalanced for high-feed conversion; and (iv) the provision and use of these inputs suggests technical inefficiency in maintenance of adaptive climate-resilient agricultural most parts of the country. Significantly more farmers use infrastructure (Vermeulen et al., 2021). inorganic fertilizers than improved seeds in the North TABLE 7.1. Imbalanced use of improved seeds and inorganic fertilizers suggests technical inefficiency among many farmers in Nigeria Percent, Share Share Share Share Share Share Share Share Share unless using using using using using using using using using otherwise inorganic organic pesticide herbicides improved animal household hired exchange states. fertilizer fertilizer seeds traction labor labor labor NC 31.6 10.9 9.2 69.3 32 16.3 97.9 70.0 42.2 NE 45.2 23.3 24.3 57.1 72 41.5 99.3 70.4 47.1 NW 69.1 59.8 21.4 23.4 9.7 43.7 98.2 81.8 38.7 SE 29.5 14.7 4.7 12.4 9.7 0.0 99.0 78.8 21.3 SS 5.6 2.1 1.0 20.0 21.0 0.0 99.1 58.2 27.8 SW 1.8 0.4 23.9 29.7 8.3 0.0 98.5 76.6 20.1 Nigeria 35.4 23.1 13.1 34.7 10.1 19.5 98.6 72.8 34.2 average Source: Nigeria General Household Survey, Panel 2018–19, Wave 4. Note: NC= North Central; NE= North East; NW= North West; SE= South East; SS= South South and SW= South West. 152 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE West and the South East, whereas more farmers use high-frequency loans, and generate information on improved seeds than inorganic fertilizers in the North creditworthiness of farmers and return on investments East, South South and South East (TABLE 7.1). Overall, in specific value chains. Recent advances in fintech and less than 10 percent of farmers used improved seeds mobile money (for example, M-PESA in Kenya) have and inorganic fertilizers together in 2018–19, which is enabled smallholders and informal enterprisers across relatively low compared with Ethiopia and Kenya, where sectors to access small and high-frequency loans with about 40 and 30 percent of farmers, respectively, used repayment terms that match their cashflow profiles. improved seed and inorganic fertilizer together (Sheahan In addition, fintech and mobile money applications and Barret, 2014). The low usage of improved seeds and have proved effective in generating credit records for fertilizers appears to be driven by supply-side constraints, smallholders, and this information can be harnessed as recent estimates suggest that the supply of open by traditional banks to identify good risks among pollinated varieties and hybrid seeds from the formal smallholder farmers. sector was 47 percent of potential demand in Nigeria (Setimela et al., 2009). Governments can support digital agriculture through various types of foundational public investments, and policy and regulatory reforms. Technology firms 7.3  Increasing smallholder farmers’ are working around the clock to develop and introduce access to credit for long-term investments new digital technologies, platforms, and products in and short-term working capital Africa. However, these innovations will benefit only those economies that embrace digitization, invest in Smallholder farmers have weak access to credit for the required infrastructure, and introduce effective various reasons. The commercial lending sector tends regulations. The main areas for public interventions to consider smallholder agriculture too risky, primarily include policies that lay the foundations for innovation because lenders face challenges in distinguishing between and the scaling-out of digital technologies, the expansion good and bad borrowers. Furthermore, lenders incur of supporting rural broadband and supporting significant costs in processing a large number of relatively infrastructure, and the collection and digitization of plot- small loans to smallholder farmers. Smallholders have level data on farmers (FIGURE 7.5). Nigeria is already weak land rights and face difficulties using land as among the leading adopters of digital technologies in collateral for commercial credit. They are less likely than agriculture, ranking third behind Kenya and South medium- and large-scale farmers to have their lands Africa in 2018 in terms of the number of scalable formally registered, primarily because most smallholders disruptive agri-tech hubs (Kim et al., 2020), and second acquire land through inheritance, and the land is often behind South Africa in 2018 in terms of the number of subdivided among siblings without passage of full rights. technology incubators and accelerators (Bayen, 2018). In addition, smallholders tend to demand small and high-frequency loans that do not match the financial Coordinated value-chain financing and warehouse products available. Agribusiness SMEs also struggle to receipt systems have enormous potential to address access credit and to invest in productive assets, capacities, the short-term working capital financing needs of and technologies that increase competitiveness and farmers, while also improving access to markets. growth. The Babban Gona model provides a proven example of coordinated value-chain financing that has effectively There is enormous scope for disruption of the link smallholder farmers to input suppliers and output financial sector through fintech, mobile money, and markets, while also providing financial services and innovations that deepen financial inclusion, provide building capacity of farmer organizations (see BOX Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 153 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 FIGURE 7.5. Public investments to support expansion of digital technologies in agriculture E-agriculture strategy Agriculture data policy Foundation Develop an e-agriculture strategy to be integrated into Devprivacy, ownership, and sharing rules, as well as the overall agricultural sector development strategy those elop data policies that clarify data mandating, data collection and protections Policy and regulatory reforms Public investment in collecting foundational data and developing platforms Ÿ Adopt pluralistic extension and service delivery Ÿ Digital farmer IDs approach to enable digital innovations and solutions Catalytic to be tested and tried for smallholders Ÿ National digital soil maps Private sector investment Ÿ Enable telecommunications infrastructure and Ÿ E-government systems, including smart subsidy investment in innovation and policy payment systems in rural and remote areas to programs platforms ensure good quality and predictable rural connectivity Ÿ Real-time agricultural weather observatory and early warning systems (satellite, geospatial) Ÿ Invest in agriculture research, including partnerships Ÿ Digital surveillance systems (satellite, geospatial) between academic programs and industry tailored for digital agriculture technologies and innovations Supporting Ÿ Support rural broadband access and last-mile internet delivery programs infrastructure Ÿ Develop rural road networks, power, and irrigation infrastructure Source: Kim et al., 2020. BOX 7.1. The Babban Gona model in Nigeria B  abban Gona works with growth-oriented smallholder farmers and provides them a private sector channel for cost-effective delivery of enhanced agricultural technologies and end-to-end services that optimize yields and labor productivity, while simultaneously improving market access. In particular, the model provides smallholder farmers with: (i) financial services—de-risking members of farmer groups to access cost- effective financing; (ii) agricultural input services—timely provision of quality inputs at competitive prices to increase productivity and product quality, while minimizing impacts on the environment; (iii) training and development—strengthening of farmer organizations; and (iv) market access—access to market services, good warehousing practices, and increased profits. Among other goals, Babba Gona aims to reach 1 million farmers by 2025 and increase their incomes fourfold. Source: Based on Babban Gona’s Our Model web page, https://babbangona.com/our-model/. 7.1). The model operates in northern parts of Nigeria The required physical investments, institutions and and could be scaled out to other value chains around services relate to warehousing infrastructure, collateral the country. Warehouse receipt systems have hardly management, registration of warehouse receipts in the been implemented in Nigeria due to lack of clarity on collateral registry, a grading system for commodities the proper regulatory framework needed to support in storage, banking and financial services, and capacity such systems. A typical warehouse receipt system building services, especially for farmers and their would enable farmers and traders to access finance by organizations. liquidating part of the value of their non-perishable commodities while searching for better prices. In addition to clarifying the regulatory framework, the proper functioning of warehouse receipt systems requires certain physical investments and institutions. 154 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE 7.4  Effective coordination of investments Recovery and Growth Plan 2017–2020 and Delivering in agribusiness value chains using on the Government’s Priorities 2019–2023.176 The approaches that co-locate investments latter sets a specific target to create 6 million jobs with critical infrastructure in the agribusiness sector between 2019 and 2023. Projections based on economic data before the onset of One of the foremost challenges constraining growth the COVID-19 pandemic indicate that the agribusiness of agribusiness value chains in Nigeria is the lack of sector was on track to create 6 million jobs by the coordination between pre-upstream inputs supply, middle of 2027, with the on-farm segment (agriculture) upstream primary agriculture, and downstream contributing most of the jobs (about 3.4 million) and off-farm agribusinesses. This fragmentation has led the off-farm segments contributing 2.2 million jobs. The to the prevalence of spot-market transactions where growth burden to create 6 million jobs is lower when farmers look for buyers after producing a commodity, as both on-farm and off-farm segments grow in tandem opposed to farmers coordinating production decisions and higher if either segment stagnates (FIGURE 7.6). on quality and quantity with buyers. Fragmentation In particular, the whole of the agribusiness sector needs has also led to high levels of food loss and waste, and to grow by 5.4 percent annually to create 6 million jobs enormous costs from food-borne diseases.175 Improving by 2024. On the other hand, if left alone to achieve the coordination will require addressing the challenges faced jobs target, the on-farm segment will have to grow by by downstream off-farm segments such as processors and 8.4 percent annually through 2024 to create 6 million exporters in building and organizing supply chains that jobs. The off-farm segment will have to grow even involve smallholder farmers. The main challenges, at faster—by 13 percent annually—to create the 6 million least from the perspective of downstream agribusinesses, jobs by 2024 on its own. include: (i) the variable quality of production and low FIGURE 7.6. The whole of agribusiness needs to productivity due to weak access to improved technology grow concurrently to create 6 million jobs faster of production and quality inputs; (ii) weak access to Agribusiness growth needed to create 6 million jobs credit and risk-sharing services, especially by smallholder Percent farmers, which has led to investments in assets with 18 poor returns; (iii) high ex-post transaction costs for 16 contract enforcement; and (iv) ineffective farmer 14 organizations that cannot effectively monitor their 12 smallholder farmers or incentivize them to invest in the 10 appropriate technology to produce the quality desired by 8 6 remunerative markets. 4 2 Coordinated investments in agribusiness value chains 0 can generate shared growth in the on-farm and off- 2023 2024 2025 2026 2027 2028 2029 2030 J Off-farm AgBus GDP growth rate required when only off-farm AgBus creates jobs farm segments and create jobs faster than when either J Primary agriculture GDP growth rate required when only primary agriculture segment grows alone. Creation of jobs remains a key creates jobs J Agbus GDP growth rate when whole of AgBus creates jobs priority of the FGN and features prominently in recent Source: Mghenyi, E. et al. 2021. government policy documents. The most recent policy documents emphasizing job creation are the Economic 175 Foodborne diseases cost Nigeria more than US$6 billion in 2016, ranking behind China, India, and Indonesia in terms of economic losses originating from foodborne diseases (Jaffee, S. et al., 2019). 176 In addition, the Economic Sustainability Plan 2020, which was prepared to organize the FGN’s response to the COVID-19 pandemic, adopted a short-term agenda to create “millions of jobs” over a 12-month period through a Mass Agricultural Programme. Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 155 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Future opportunities in off-farm agribusiness that foreclose any collaboration between farmers and segments will increasingly be in processing, input the agribusinesses. The Framework for Responsible and supply and food services. Currently, the trading Inclusive Land Intensive Agricultural Investments177 and transportation segment is the largest in off-farm provides authorities with a solid approach to guide land agribusiness and this segment can continue to grow administration in a manner that would maximize the with increased urbanization and commercialization of role of land in development, while effectively mitigating agriculture. However, the processing, input supply and the risks of land-based investments. This framework food services segments will have more potential for would provide many benefits that include: (i) providing growth as the sector transforms. Realizing this growth an enabling environment to mitigate conflicts arising and jobs potential will require: (i) better coordination from competing claims on land, thus improving investor of agribusiness value chains to reduce fragmentation, confidence; (ii) enabling complementary investments as opposed to vertical integration of processors into on land in growth clusters (e.g., agribusiness, roads, large-scale primary production; (ii) the provision of waste management, educational institutions) and infrastructure services (especially roads and energy) observes laid down environmental and social safeguards; in clusters where agribusinesses are located; and (iii) protecting the rights and economic opportunities of (iii) diversifying production toward higher-value farm local communities to ensure that they benefit optimally products such as cash crops and livestock products, from large-scale investments, thus enhancing shared and toward agricultural inputs such as animal feeds and prosperity and broad-based welfare gains from land- fertilizers. Two broad approaches could be considered: based investments; (iv) ensuring the participation of all (i) greenfield investments that involve large amounts of stakeholders in decision-making around land acquisition capital injections by anchor agribusinesses that are largely and utilization, and empowering the communities to new entrants in the domestic market; and (ii) brownfield participate in their own development; (v) establishing investments that build off of existing agribusiness mechanisms for accountability of government SMEs that are already established in the sector but with institutions by providing toolkits and checklists to ambitions to expand and grow. The main advantage of formalize the decision process on land acquisition and working through brownfield SMEs is that they would allocation; and (vi) providing mechanisms for effective already be having relationships that can be expanded at mitigation of potential environmental and social risks relatively lower cost and have experience in the operating associated with land-intensive investments. environment. The main advantage of working through greenfield investors is that they provide the opportunity to operationalize bold initiatives that co-locate private 7.5  Conducive Macroeconomic, Trade, agribusiness investments with public infrastructure such and Sectoral Policies as roads and energy. Either of these approaches could suit certain contexts and specific value chains. The performance of agribusiness value chains is mediated through a complex set of foundational and Land reforms should discourage vertical integration competitiveness factors that ultimately determine of processors into large-scale primary production, productivity, competitiveness, and coordination as that often leads to physical and economic arrangements. Foundational factors relate to the displacement of smallholder farmers from value macroeconomic environment, trade policies, sector chains. Examples abound of cases where states have development policies, and institutions (World Bank, allocated large tracts of land to processors at the expense 2019). These factors determine the incentive structure of local farmers that use the same land for various for farmers and agribusinesses to invest and compete in purposes, including farming, often leading to conflicts domestic and external markets. They also determine the 177 Kaduna and Ogun States are implementing the Framework for Responsible and Inclusive Land Intensive Agricultural Investments through World Bank financed projects – Kaduna State Economic Transformation Program-for-Results and Ogun State Economic Transformation Project. 156 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE FIGURE 7.7. Rice production in Nigeria responded FIGURE 7.8. Rice yields in Nigeria have stagnated to the trade restrictions despite the trade restrictions Rice production in Nigeria Rice yields in Nigeria Million tons Tons per hectare 9 2.5 8 2.3 7 2.1 1.9 6 1.7 5 1.5 4 1.3 3 1.1 2 0.9 1 0.7 0 0.5 19 0 19 3 19 9 20 0 20 3 20 9 19 0 19 3 19 9 20 0 20 3 20 9 19 1 18 19 8 19 1 18 19 1 19 8 19 1 76 82 82 12 06 12 76 06 64 94 64 94 20 5 19 5 20 5 19 5 19 7 20 7 19 7 20 7 7 7 7 0 0 0 0 0 7 7 7 0 6 8 9 6 8 9 1 8 1 8 6 9 6 9 19 20 19 20 19 19 19 20 19 20 19 19 19 19 Source: Mghenyi, E. et al., 2021. Source: Mghenyi, E. et al., 2021. approaches used by actors to organize investments and again to 110 percent in 2013. A major shift in import transactions. The various segments of the agribusiness policy occurred in 2016 when the FGN banned rice sector—inputs suppliers, farmers, processors, food imports, in addition to the 110 percent import tariffs services, and so on—rely on public institutions to (Abbas, Agada and Kolade, 2016). Rice import volumes deliver the necessary amounts of public goods and have decreased tremendously following the trade services to catalyze private investments. Competitiveness restrictions. Meanwhile, rice production grew steadily factors operate within the foundational factors to by more than 12 percent between 2010 and 2016 but ultimately determine productivity and competitiveness. growth has decelerated significantly in recent years. Competitiveness factors include access to improved technology of production, finance, skills of workers, The supply response to rice trade restrictions was and markets. Many agriculture value chains are not driven by expansion of area under cultivation, but competitive in the domestic market and this has yields barely improved, w  hich clearly demonstrates prompted the FGN to intervene through measures that increasing the competitiveness of rice sector will aiming to severely limit access of the domestic market by require investments to develop high-yielding varieties GVCs. and improve quality attributes of local rice (taste, aroma, texture, etc.). The supply response was driven by While trade restrictions have generally increased cultivated rice area, which increased from 6.74 percent domestic production, they have had limited impacts in 2010–14 to 10.63 percent in 2015–16. However, on long-term competitiveness, which relies on this expansion in area under cultivation could not be productivity growth and improved quality. For sustained and there was negative growth of -5.23 percent example, Nigeria had for many years been one of the in cultivated area in 2017–18. Rice production has world’s largest rice importers. Growth in rice imports decelerated significantly since 2016. Clearly, the supply started to increase rapidly in 1995 and this prompted response from import restrictions has waned out and trade policy responses to reduce the import bill, it is becoming clear that rice trade policy alone will beginning with the introduction of import tariffs in not improve competitiveness in the domestic market. 1995. The tariffs have been revised several times over the Furthermore, the increased production alone will not years. Import tariffs increased from 50 to 150 percent meet the demand until the quality attributes of local rice between 1995 and 2008, were reduced to 30 to improves to match imported rice quality. 50 percent between 2008 and 2012, and then raised Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 157 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options Why Reforms Are What Impact These Which Reforms Are Critical Needed Reforms Could Have Increase private sector investments in seed development and multiplication, increase the supply of improved seeds, and remove poor quality seeds from the market. • Agriculture • The National Agricultural Seed Council (NASC) to • Increased private productivity has develop and publicize written procedures and guidelines sector participation in barely changed in for the private sector to access germplasm from public seed development, Nigeria for decades sources for carrying out research to generate early multiplication, and and appears to generation seeds and for seed multiplication (currently no marketing to farmers be trapped in a guidelines are available, but two seed companies have • Removal of low- low-productivity accessed germplasm). quality and fake seeds equilibrium, save for • The NASC and private sector seed companies to jointly from the market a few value chains. develop and implement business models for PPP in • Increased availability • The effects of the production of early generation seed to alleviate the of quality seeds, climate change persistent problem of inadequate supplies (various PPP including imported are exacerbating options are currently being considered). seeds the problem of • NASC to develop and roll out protocols for decentralizing persisting low • Increased crop seed quality assurance through third parties, such as productivity and agricultural private seed inspectors and laboratories (currently only productivity. production cassava is covered on a pilot basis). • Farmers need to • NASC to finalize and roll out the implementation of access seeds that regulations, SOPs, and build technical capacity to are high-yielding recognize and protect breeder’s intellectual property and resilient to the rights, consistent with the Plant Variety Protection (PVP) effects of climate Bill, beginning with conducting Distinctiveness, Stability change in order to and Uniformity tests required to grant property rights. sustainably increase productivity. • NASC to assess the efficiency, transparency and cost- effectiveness of its variety release system and update the system to ensure consistency with international best practice. • The Federal Ministry of Agriculture (FMARD) and NASC to finalize and roll out implementation of SOPs for seed inspectors to carry out the duties and obligations specified in the National Agricultural Seeds Council Act 2019. 158 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (contuned) Why Reforms Are What Impact These Which Reforms Are Critical Needed Reforms Could Have Increase the supply of fertilizers, enable farmers to access blended fertilizers that address specific plot-level soil nutrient deficiencies, and remove poor quality fertilizers from the market • Fertilizer use rates • The FMARD has established digital platform for fertilizer • Increased private in Nigeria are lower companies (manufacturers, blenders, and agro-dealers) sector importation and than recommended to apply for registration, provide feedback and capture marketing of fertilizers rates for nearly all activities of field inspectors. The platform could be • Improved fertilizer crops, primarily expanded with modules that enable sensitization and availability, especially because farmers education of these stakeholders on the fertilizer reforms – to smallholder farmers cannot access as well as feedback mechanisms. fertilizers. • Improved quality • Integrate the feedback and information generated from of fertilizers in the • The supply gap has the digital platforms with extension services to provide market led to imbalanced continuous communications campaigns targeted to use of fertilizers farmers and farmer organizations on effective quality • Increased crop with improved control of fertilizers, the concept of plot specific productivity and seeds, a major fertilization based on small area soil testing, and the production source of technical opportunities available with fertilizer blending to meet plot inefficiency and low specific nutrient requirements. productivity • Finalize and disseminate the SOPs for fertilizer testing so that testing protocols are harmonized between the Reference lab in the country and private sector labs, to ensure comparability of results especially in cases where litigation is involved. • The FMARD to develop SOPs for fertilizer inspectors to carry out the duties and obligations specified in the National Fertilizer Quality (Control) Act 2019, including inspections of premises handling fertilizers and taking of official samples for analysis. • The FMARD to develop regulations that require fertilizer manufacturers and blenders to put satisfactory security features on product packages to enable tracing the source of adulteration. Accelerate climate change adaptation strategies to sustainably increase agricultural productivity and mitigate environmental degradation • The effects • Transitioning livestock production away from pastoral • Reduced of climate are systems that are notorious for poor environmental environmental worsening low management toward more intensive systems with better degradation and agricultural feeding to reduce emissions and improved breeding for increased crop and productivity high-feed conversion. livestock productivity and causing • Strengthening irrigation water management at farm and • Increased capacity environmental catchment levels to enhance water user efficiency. of farmers to prepare degradation for seasonal weather • Strengthening climate risk information and risk management services such as seasonal weather variability and longer- forecasts for farmers, early warning systems that can term climate trends, help anticipate and manage natural disasters, pest including adjusting outbreaks and yield failures, and crop and livestock the timing of land insurance. preparation and planting, selecting varieties with shorter maturity periods, etc. Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 159 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 Key Policy Options (contuned) Why Reforms Are What Impact These Which Reforms Are Critical Needed Reforms Could Have Improve smallholders’ farmers capacity to vertically coordinate with buyers and participate in remunerative value chains • Smallholder • Federal and state agriculture ministries to build effective • Increased production is farmer organizations that can effectively monitor their farmer access to characterized by smallholders’ farmers to meet obligations with buyers, large buyers in variable quality of incentivize them to invest in appropriate technology to remunerative value production and low produce the quality desired by remunerative markets, chains productivity due and transition farmers from livelihoods-oriented farming • Reduced transaction to weak access systems to growth-oriented agribusiness production. costs for contract to improved • State governments to adopt land reforms that discourage enforcement technology of vertical integration of processors into large-scale primary • Reduced postharvest production and production as that often leads to physical and economic quality inputs loss and waste displacement of smallholder farmers from value chains. • Farmer The Framework for Responsible and Inclusive Land organizations tend Intensive Agricultural Investments is an option that can to be weak provide many benefits to state governments, farmers, and off-farm agribusinesses. Increase farmers access to credit and risk-sharing services • Farmers have • Gazetting of rules developed by the Securities and • Increased farmers weak access to Exchange Commission (SEC) to provide the regulatory access to credit, credit for long-term environment for warehouse receipts. through fintech investments and • SEC to provide guidelines for certification of warehouses solutions, warehouse short-term working based on existing rules and regulations, in a manner that receipts, etc. capital is credible and based on the independent assessment • Increased • Weak access to of reliable evaluators of assets, usually by private sector investments by the credit and risk- agencies. private sector in sharing services • The CBN to facilitate admission of warehouse receipts warehousing and has led to farmers in the collateral registry so that the financial instrument improved standards investing in assets could be registered in a designated, reliable, easy-to- of collateral with poor returns register, and easy-to-search registry. management and quality of facilities • Commodity exchanges and state agriculture ministries to facilitate capacity building of farmers organizations • Improved price to understand how to use the warehouse receipt discovery, especially instruments, their rights and obligations, grades and for farmers who they standards for commodities, proper post-harvest handling tend to have less before warehousing, etc. market information • Federal and state government agencies to lay the foundations for fintech in agriculture by expanding rural broadband and supporting digitization of plot-level data on farming. 160 Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added TECHNICAL NOTES  |  CHARTING A NEW COURSE Key Policy Options (contuned) Why Reforms Are What Impact These Which Reforms Are Critical Needed Reforms Could Have Commitment to long-term trade openness for agricultural commodities and inputs, beginning with implementation of the AfCFTA Why? • Federal government to reduce import tariffs and technical • Increased farmers barriers to trade for agricultural commodities as per the access to quality AfCFTA framework. inputs such as • To facilitate trade in seeds, the Seed Registration and imported seeds and Release Subcommittee should develop and publicize: animal breeds (i) the testing requirements for varieties imported for • Increased exports seed production and (ii) the requirements for seeds of agricultural imported for commercialization; distinguishing between commodities from ECOWAS countries versus outside the ECOWAS region. Nigeria The advisory is needed due to lack of a functional and • Improved service verifiable seed catalogue system in ECOWAS region. delivery and • Federal ministry responsible for trade to establish confidence of actors electronic phytosanitary system to streamline export in export value chains procedures and issue phytosanitary certificates on site. • Reduce the time and cost of obtaining mandatory, agriculture-specific, per-shipment export documents. • Rationalize fees on exports levied by the Nigeria Export Levy and the Nigeria Export Supervision Scheme to avoid double taxation and remove bureaucratic hurdles for obtaining support from the Nigerian Export Promotion Council. Note 7: Modernizing Nigeria’s Agribusiness to Boost Domestic Value Added 161 NIGERIA COUNTRY ECONOMIC MEMORANDUM   |  DECEMBER 2022 References Sheahan, Megan and Christopher B. Barrett. 2017. “Ten Striking Facts about Agricultural Input Use in Sub-Saharan Africa.” Food Policy 67: 2–25. 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