Diversification of The Economy? Yes, But

OUTSIDE THE BOX

BY ALEX OTTI

“Planning is an unnatural process. It is much more fun to do something else. The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression. Failing to plan is planning to fail.” Sir John Harvey Jones (1924-2008).

It is no longer news that our economy has made it into the recession territory. What is news is that we seem to have been caught unawares as articulated by the erstwhile University Chancellor Sir John Harvey Jones. I say unawares, not because some people did not foresee it, but because, we don’t seem to have been prepared for it. Let me start by saying what this article is not about. We are not here to apportion blames. Neither are we here to look for what they call “who donnit”?  The reason is that going in that direction may lead us to loose the essence of the discussion. We intend to refocus the argument and possibly change the narrative about diversification of the structure of the Nigerian economy by establishing the central place of planning and deliberate actions for pre-determined results.

There seems to be a consensus that our problem is what analysts call concentration risk. This means that because we relied on a single product for virtually all our foreign exchange earnings, the drop in the international price of that product led to a massive reduction in the quantum of foreign exchange available to us. Besides, we are forced to shut down some of our oil production as a result of the activities of militants in the Niger Delta. This is worsened by the fact that what we spent the hitherto available foreign exchange to buy from other countries have not reduced. Given this scenario, we are forced to either ration the scarce foreign exchange by allocation to only a few areas or sell toonly those who can afford it, leading to a more expensive foreign exchangeregime. To tame the slide, at least in the short run, a few actions have been taken.

Solving the problem more permanently has led to the issue of diversification of the economy to enable us produce other things and reduce dependence on oil. Unfortunately, the discussion of diversification, seems to have been narroweddown to agriculture and solid minerals. In this two part intervention, I will like us to exhaustively look at diversification and determine if the way we are pushing it will solve our problems on a long term basis so that we don’t come back to the same issues in a few years when we are faced with another round of drop in prices.

There is no argument that prices of primary products and natural resources are not within the control of producers. They are in the main determined externally by buyers. Unlike oil that has a cartel called OPEC, whose figures we are going to rely heavily on in the course of this discussion, agricultural products, (and that is if we are going to produce them in a competitive manner to enable exports) and solid minerals do not have a cartel to protect exporters. It therefore follows that sellers are at the mercy of market forces and powerful buyers. We must look at diversification beyond replacing one natural resource with another or increasing the number of resources in the basket, for a more enduring solution to our economic problems.

Before now, we used to pride ourselves as an oil economy. We were celebratedas the 6th largest producer of oil. Maybe that was factually correct but it was also relatively and analytically misleading, and I will explain why shortly. We went on a spending spree, competing with the real oil economies of Saudi Arabia, Kuwait and Qatar. We flooded our country with all manner of imports from private jets to toothpicks. When you look at the OPEC’s Annual Statistical Bulletin 2016, a few shivering details will come to the fore and probably help us to learn a little humility. There are 13 member countries of OPEC accounting for over 80% of world oil supply. Comparing 2015 average figures for some African OPEC countries with Nigeria, Algeria produced 1,157,000 barrels of crude oil per day (bc/d) while Angola produced 1,767,000 bc/d. Going to the Arab World, Kuwait produced 2,859,000 bc/d while Qatar produced 656,000 bc/d. Nigeria on the other hand produced     1,748,000 bc/d. Now, compare the daily production quotas with their population to understand, for purposes of this discussion, how many barrels of oil each person in each country would be entitled to. Algeria has a population of about 40m people while there are just about 25m people in Angola. Kuwait boasts a meager 4m people while Qatar has less than 2.5m people. Compare these figures to Nigeria that has over 180m people to share the crude oil amongst. Simplifying the math, it means that while 35 people shared 1 barrel of crude per day or the dollar equivalent in Algeria, 14 people shared a barrel in Angola, 2 people shared same in Kuwait and 3 people in Qatar. 3 people each also shared a barrel in Saudi Arabia and United Arab Emirates respectively. Meanwhile, a whopping 370 of us in Nigeria shared 1 barrel of crude oil per day. What this means is that even if oil prices were to climb to $150 per barrel, each Nigerian would have been entitled to only 40 cents daily as our share.

Again, another sad commentary is in the area of how we have harnessed crude oil to add value to citizens by refining products locally and exporting less of crude, while creating jobs by ensuring that we don’t only maintain huge refining capacity but that it works. Algeria’s refining capacity is 650,000 b/d but it refines 628,000 b/d and consumes 418,000 b/d, exporting 210,000 b/d as refined products. Kuwait’s installed capacity is 936,000 b/d. It refines 1,013,000 b/d while its domestic demand is 345,000 b/d leaving it with about 668,000 b/d of refined products for export. Qatar’s installed capacity is 283,000 b/d, but it refines 611,000 b/d. Its local demand is 206,000 b/d while it exports 405,000 b/d of refined products. It must be noted that both Qatar and Kuwait who refine more than their installed capacity have condensates and Gas to Liquids (GTL) computed as part of their final products.

Nigeria is the only one here with a very dysfunctional story. We have installed refining capacity of 455,000 b/d, and refine a dismal 24,000 b/d locally leaving a wide gap of 384,000 b/d for importation given that our domestic consumption is in the region of 408,000 b/d. It is in this area that we, as a country stood logic on its head and inflicted serious injury on our economy by exporting jobs, exporting our foreign reserves and importing poverty. All these have been made possible because we did not plan on how to benefit from the resources that we were blessed with. Had we planned better, we would have ensured that we improved not only our refining capacity, but also our output of refined petroleum products. If we did that, we would have been shipping final refined products rather than crude oil. It may seem late, but I don’t believe that we cannot do anything about it, even at this moment.

Given the picture painted above, everyone seems to agree that the solution to our problem is diversification. States have led the way by encouraging citizens to go back to the farm. One of the states in the South East has declared a three day work week to enable civil servants spend the remaining two days in the farm. The call to go back to the farm is a welcome development, if for nothing to ensure we have food on our table and positively engage a lot of the unemployed members of our society.  However, the assumption that agriculture will boost our foreign exchange earnings and solve our problems is misplaced. Before you can earn foreign currency, you must have exported something. Granted that we have some crops like cocoa, cashew nuts, and Palm fruits that are exportable, many of our crops cannot be exported. Even when they are required by foreigners, the strict conditions attached make it unattractive. We are also not in a position to add a lot of value to our crops. Herein lies the danger pointed out earlier with respect to who determines prices of agricultural products. Buyers determine the quantity, quality and price of the crop. Yours truly suffered this fate some 20 years ago when I made a foray into exporting cocoa. A friend approached me to invest in his cocoa exporting business about a year before and the returns I was getting were quite healthy. By June 1996, I took a break from banking to go and set up a full-fledged commodity trading company with staff in Ikom in Cross River State and Idanre in Ondo State. Business looked good until a few months later when the major international buyers decided to crash prices by reducing demand. In one week, cocoa shelved over $400 per tonne in export prices, sending most of us reeling in loses and subsequently out of the market. The rest, like they say, is history.

The other focus of our diversification is solid minerals. It has been reported that we are blessed with 44 solid minerals found in commercial quantities across the length and breadth of the country. Out of this number, 7 have been prioritized by the Federal government for investment by the public and private sector with generous incentives to “exploiters” and investors. The seven preferred minerals are gold which we have large alluvial and primary deposits in commercial quantities spread in the North West and South West. Iron ore is readily available in the country, in fact we have the 12^th largest reserve in the world with over 3billion tonnes found. We also have about 42billion tonnes of bitumen in reserves. This is twice our crude oil reserves. We have over 10m tonnes of Lead/Zinc deposits and 3billion tonnes of low sulfur and low ash Coal in the country and it is estimated that this can power about 30% of our energy demand in years to come.  We are also extremely rich in limestone deposits as 2.3trillion tonnes deposits exist across different states of the country. We also have deposits of Baryte and Bentonite to the tune of close to 10million tonnes and 700million tonnes in reserves respectively.

Statistics has it that solid minerals contributed about 1% to the GDP in 2014 and all things being equal, it is expected to increase to 5% in 2017 and 10% by 2020. It is also expected to create about 3million jobs by next year. While all these will be of immense help to the economy, my worry is that just like oil, we cannot ensure against massive fall in prices after we would have made heavy investments. My contention is that quite unlike oil where major producers have organised themselves into a cartel, it is much more difficult to benefit from such an arrangement in the solid minerals space. In planning our economy, we must pay attention to sustainability. It is time we looked at enduring activities that would guarantee economic development in an intelligently planned fashion over the long run as distinct from knee jerk reaction to economic cycles which are bound to happen from time to time. We need to do things that would encourage talent, creativity, research and development and knowledge. I dare say that the ruling economies of the world today are knowledge economies and not resource-rich economies. If you are still in doubt, I will leave you with this Chinese proverb “If you plan for one year, plant rice, if you plan for ten years, plant trees, if you plan for 100 years, educate minds” Finally, may I use this opportunity to wish my Moslem brothers and sisters a happy Eid.