Culled—Proshare
11/6/2018/Proshare Research
Gross Fixed Capital Formation: Unbuckling Capital Formation
Fig 1: Gross Fixed Capital Formation
Source: CBN
A cursory look at the nation’s low level of capital formation on a quarterly basis, pinpoints to the limitation of economic drivers. For instance, over the past 6 years Nigeria’s average gross fixed capital formation have been N2.374 trillion, evidently that is tepid compared to the size of the nation’s GDP. For instance, capital formation have been tepid, however labor entry have continue to grow at a rapid rate.
Income levels were always going to fall as long as structural factors have held capital formation. In reality, countries which have robust and adequate capital formation are poised with the right ammunition to drive Gross domestic product. However, countries with low capital formation have relatively dimmer chances of driving income and widening up economic opportunities. Moreover it’s a measure of investment, thus countries with tepid capital formation have relatively low shock absorbers. At the same time, countries which are able to mobilize gross capital formation are less vulnerable to export concentration, thus addressing supply side economics will be less problematic.
Obviously, Nigeria is in need of capital to grease the economy. Moreover, Nigeria has one of the lowest ratio of capital formation and a robust labor, no doubt a risk to income levels.
Fig 2: Capital Formation among Selected Countries
Source: world Bank
How to unbuckle capital formation:
- Evidently the new CAMA act, create the attraction for not just foreign capital formation but also domestic capital. Thus measures like this will aid capital formation
- Government needs to amplify the existing pre conditions for growth, varying from price stability to strong institutions. Besides, Nigeria has one of the lowest private contribution to gross capital formation, thus there is an urgency to jack this up.
- There is a need to address infrastructure especially road and rail networks, the inability to address this will continue to leave capital formation stagnant. In addition, there is a need to increase the stock of Infrastructure to GDP by improving credit deepening
- A large chunk of the economy remains informal, it is necessary to address these structural strains. In many circumstances, the informal sector is left out thereby making it harder to beef up capital.
- There is a need for policy clarity, lack of political clarity have remained a headwind to capital formation and further liberalizing
Fig 3: Saving from 2015 Q1 to 2016 Q4
SourceWorld Bank
- Nigeria so far has failed to mobilize savings for real activity, this remains a challenge. Savings to GDP stands at 22%, thus there is a need to mobilize savings to the real sector.
- Nigeria must begin to keep to long term growth, how growth has been is largely dictated by short to medium cycles. It makes it hard to ramp up physical stock.