We are proud to be the technical partner for the Presidential Committee on Free Trade’s Power Infrastructure and Services Sector. The National Action Committee on the African Continental Free Trade Area (NAC-AfCFTA) is tasked with preparing both the public and private sectors in Nigeria to harness the immense opportunities presented by the AfCFTA agreement. This article helps explain why Trade for PUTTRU and includes a call to relevant stakeholders to collaborate with us to achieve this vision.
The factors behind why many African countries struggle to attract investments have a connection with their economy and macroeconomic conditions. In 2022, using Nigeria as a case study, we published a groundbreaking white paper titled ‘Trade, Energy and Climate Change: Harmonizing Nigerian and Global Concerns on Climate.’ Our mission was clear: we aimed to cut through the noise surrounding investment in African nations and dissect the root causes while offering practical solutions.
We took a complex academic field and distilled it into an accessible resource for anyone interested in understanding the intricacies of the topic. Reading this White Paper will provide invaluable insights into why productivity, particularly in densely populated countries like Nigeria, is crucial for African nations.
In this paper, we firmly asserted that boosting productivity and fostering net exports/trade are pivotal elements for propelling Nigeria’s economy. This transformation is key to making the country more appealing to investors and enabling the mobilization of essential capital for infrastructure development in pursuit of a carbon-neutral economy.
Our commitment to this vision has remained unwavering since the inception of PUTTRU, and we have made significant strides in realising this vision by partnering with the Nigerian Government towards addressing the issue of power supply to unlock productivity and investments in Nigeria.
Below is a summary of the Chapter Three (3) of the White Paper whose title is: Introducing the Economics of Attracting Investment.
What is Inflation: How inflation works and what causes it
Individual economies have varying quantities of resources that determine their capacity to produce at any given time. Capital, labour, energy and other deployed resources will determine the difference between one economy’s output and another’s. The capacity of economies to mobilise and employ these resources effectively could be affected by a number of factors, including supply shocks. Adverse supply shocks and lack of energy supply reduce the capacity of an economy to produce. In turn, by limiting economic output, this leads to inflation – as more money pursues fewer goods.
Inflation has the capacity to erode the value of money and introduce uncertainties, causing investors to lack confidence in an economy. To address inflation, the monetary policy response is to increase interest rate. On their part, higher interest rates reflect the scarcity of the goods and services in high demand, with the objective being to reduce demand. By reducing demand, consumption reduces and so does output. Thus, inflation provides a feedback loop informing businesses to restrict investment in that economy. Through these actions, there is a fall in the total level of spending in an economy to produce goods and services demanded by households, businesses, governments and for export (i.e. aggregate demand), owing to the indirect relationship between aggregate demand and inflation.
It is for this reason that keeping inflation low is a priority for countries, as this plays a key role in encouraging spending and investment.
the main determining factor is not the interest rate but investors’ confidence in the future prospects of the economy
High inflation and the need for Investor Confidence
The effect of Nigeria’s high inflation rate can be observed in the interest rate charged by commercial banks. The average prime rates for lending to power and energy companies is 15.58% and that for the maximum rate, which reflects the credit spread in the country, is 23.9%. For prime rates, the range is 5% to 25% and for the maximum the range is 11% to 30%, this is according to 2022 data from the Central Bank of Nigeria.
The high interest rate in Nigeria is a deterrent to investment, as explained above. However, some schools of economics argue that, although an important factor, the main determining factor is not the interest rate but investors’ confidence in the future prospects of the economy, that is, if investments are made towards increasing productive capacity today, there is likely to be payoff in the future and the rate of return will likely exceed the high interest rate.
Thus, in situations where the present state of the economy does not provide comfort to investors, government spending, especially with regard to capital projects and other expansionary policy positions, would be needed to increase the economy’s aggregate demand and, thus, stimulate businesses to invest in the economy.
Increasing productivity and net exports/trade is considered in PUTTRU’s White Paper as a critical component of growing Nigeria’s economy to a stage where the country becomes increasingly attractive to investors and gets into a stronger position to mobilise the necessary capital for infrastructure development to support a carbon-neutral economy.
Inflation and the need for Increasing Nigeria’s Trade Capacity
According to Adenikinju, cited in the White Paper, “Inflation primarily impacts imports and exports by affecting the exchange rate. High inflation results in higher interest rates, which results in weaker currencies and makes imports relatively cheaper than domestic output.”
Thus, in Nigeria we see that exports are affected by inflation as it becomes cheaper to import goods and services than to produce them in the country. During the pandemic-triggered recession, from Q2 of 2020 to 2021, the naira weakened to the dollar, pound sterling, euro, yuan and other major currencies (CBN, 2022). This should have had an effect of increasing exports from Nigeria, which should increase aggregate supply. Imports of goods and services (as a % of GDP) fell from 19.8% to 16.57% (i.e. a percentage change of -16.3%) from 2019 to 2020. However, exports as a percentage of GDP fell more, from 14.22% to 8.83% (a percentage change of -37.9%) for 2019 and 2022 respectively (World Bank, 2022).
Increasing productivity and net exports/trade is a critical component of growing Nigeria’s economy to a stage where the country becomes increasingly attractive to investors
Double-digit inflation levels, excessive interest rates, high unemployment and a depreciated naira alongside a negative trade balance all point to issues of production capacity constraints affecting aggregate supply in Nigeria’s macroeconomy. Furthermore, at a very low level of production capacity, it will not require having a large volume of money in circulation for Nigeria’s economy to reach full capacity and enter crisis levels.
Energy being an input for productivity, the country’s energy crisis is one source of adverse supply shocks in Nigeria’s macroeconomy. Nigeria is currently far from her true production capacity, and the existence of persistent adverse supply shocks in Nigeria’s economy means that demand for goods and services for her 206 million people results in aggregate supply quickly approaching full capacity, further driving inflation up and keeping unemployment high. Moreover, this is evident in the fact that there is still a very high demand for imports despite the naira’s weakness.
Solving the low Investor Confidence issue through Energy Supply for Trade
As we have also shown, adverse supply shocks—a clear example of which is the low level of energy supply and consumption in Nigeria, among other issues faced by Nigerian firms—reduces the capacity of producers in the country to supply goods and services as well as invest towards increasing production capacity in the country. According to Ikeonu (2022), reliance on alternative power generation by the commercial and industrial (C&I) sector substantially increases cost of production and renders goods manufactured in Nigeria uncompetitive. Research by the Nigerian Electricity Regulatory Commission (NERC) found that industries were spending as much as 40% of their cost on running and maintaining diesel generators (Ikeonu, 2022).
The issue with Nigeria’s negative net exports on average is that it is large and has persisted for years, cumulatively. Exports from Nigeria have been contracting at a CAGR of -15% from 2012 to 2020, negatively impacting on the GDP of the country, employment levels and investment.
Investing in Power Infrastructure for Trade, Employment and Investment
Goodwin et al., (cited in the white paper) note that while the usual response to rising inflation is to hike interest rates, a more effective response from government would be to tackle unemployment through expansionary monetary policies that drive down interest rates over time.
For Nigeria, this would mean more investment in energy and power infrastructure to increase the supply capacity of goods and services in Nigeria. This would be followed, at the same time, by investment in manufacturing and agricultural (e.g. production of fertilizer) industries that have forward and backward linkages with Nigeria’s extractive industries (mining and steel, petroleum).
It is important to stress that without adequate investment in power infrastructure, production in Nigeria will remain globally uncompetitive and, given the current poverty levels, cheap imports will remain attractive to the populace (Ikeonu, 2022).
Putting private finance to good use: our role in this
“Expenditures to boost productivity like expanding energy infrastructure should not necessarily come from the government, which is already saddled with high public debt”Adeola Adenikinju
An effective investment strategy would be one that prioritizes using public funds to boost investor confidence, while a more substantial portion of the required investment must ultimately come from private sources. Given the circumstances in Nigeria’s macroeconomy today, parties must look towards achieving results based on an incremental approach, focusing on projects that steadily enhance this confidence. This is where PUTTRU plays a pivotal role – our government partnership is strategically aimed at fostering robust public-private partnerships (PPPs) in Nigeria, instilling trust and confidence in the future of Nigeria’s economy. We have several projects in development and are eager to engage in discussions with relevant stakeholders.
 CBN (2022). Deposit and Lending Rates in the Banking Industry for the week ended April 22, 2022. Available at: https://www.cbn.gov.ng/Documents/depositandlending.asp
 Aggregate Supply explains the impact of inflation on amount of goods and services a country’s producing section is willing to supply to the market and the effects of capacity constraints.