Replacing Oil as Mainstay of Nigerian Economy

Nume Ekeghe writes on the need to urgently diversify from an oil-dependent economy to avert concurrent economic headwinds

The Nigerian economy for decades has been largely dependent on oil as its main source of revenue, despite several policies, measures, and efforts that were put in place to rectify the situation by diversifying into other sources of income. 

Despite contributing more than 80 percent of the country’s revenue as well as foreign exchange earnings, the oil sector’s contribution to Goss Domestic Product is minuscule. According to the latest GDP figures, for the second quarter of 2022 released by the National Bureau of Statistics (NBS), the contribution of the oil sector to real GDP was 6.33 percent, down from the figures recorded in the corresponding period of 2021 and the preceding quarter, where it contributed 7.42 and 6.63 per cent respectively.

While progress is being made to reduce the country’s dependence on oil, Nigeria can still be referred to as a mono-product economy. A Mono-product economy refers to an economy mainly dependent on a single product or resource for economic growth and development. The concept could further be referred to as a case where a country depends on a single product for sales or exports for its budget funding, especially to the tune of 70 percent of revenue.

Oil and gas accounted for 90 percent of export income in the first quarter of 2022 and 85 percent of government revenue in Nigeria thereby making the country a mono-product economy owing to its dependency on oil and gas. 

This is despite the fact that Nigeria is a hugely agrarian economy with vast arable land. The country also has a large proportion of the population into agricultural activities for their livelihood, and statistics show that even though Nigeria has over 80 percent of its land arable, less than 40 percent of the land is cultivated

Speaking at a seminar for finance journalists and business editors, the Director of Trade and Exchange Department of the Central Bank of Nigeria (CBN), Dr Ozemena Nnaji listed the challenges faced by a mono-product economy. According to her, a mono-product economy is unstable, an increase or decrease in the world price of the same product will affect the budget of the economy

Adding that high percentage of unemployment is one of the downsides, she said, “An import-oriented economy weakens the foreign exchange base of a country’s currency. The economy is dependent that is it cannot stand on its own. It weakens local production of products that are imported into the country. In addition to importation of finished goods a country may also import inflation and other economic effects.”

Also, Dr. Biodun Adedipe, of B. Adedipe Associates Limited decried the dependence of the country on oil. He noted that for Nigeria, concentration risk is pervasive and found in practically every major aspect of the national economy.

He said, “The most fundamental is the place of crude oil in every and all equations in Nigeria, foreign earnings; government revenue; sectorial contribution to GDP; institutions; funding of education; urbanisation; etc.”

Impact on Nigeria

On his part, Professor Ken Ife, Development Consultant & Lead Consultant, Industry & Private Sector Development, ECOWAS Commission said Nigeria is still a predominantly import-dependent economy, despite half a century of lip service of diversification, backward integration, and import substitution.  

“The import dependence is compounded by a monocultural hydrocarbon dominated forex import earner that accounts for 79 percent in crude oil and 10 percent in natural gas, a third of banking sector credit, and half of government revenues, even though petroleum sector accounts for just over five percent of the GDP.

“The impact of this is that Nigerian economy is on the transmission belt of global supply chains.  Any exogenous global headwind affects the Nigerian economy. 2008/2009 global financial crisis precipitated by US sub-prime mortgage forced CBN to set up AMCON that gulped N6 trillion to clean up the balance sheet of Nigerian banks and financial institutions.

“In 2017 global energy crisis forced Nigeria into stagflation, provoking extreme measures and domestic finance intervention in support of backward integration of 31 items delisted from CBN Forex eligibility. By 2020 Covid – 19 global pandemic and global supply chain disruptions pushed Nigeria into a deep recession and now, Russian – Ukrainian conflict. Crashes in crude oil prices between 2015 and 2017 resulted in a loss of over $100 billion (N 41.5 trillion). In this current recession, we must have lost over $30 billion in foreign exchange, “he said.

Need for Diversification

Adedipe stressed the need for diversification of the country’s income stream from oil, noting that, “diversification means that we don’t rely on only one or few related sources of revenue, income or inflows.”

Adedipe explained that with fossil fuel gradually going out of fashion, “about 80 per cent of Nigeria’s merchandise export is under threat! There is frenzied pursuit of clean and green energy to address climate change. Green bond issuances and other funding are massively flowing into developments in this space.”

He also listed as reasons the government must move away from oil, the cocktail of policies and incentives driving the evolution of electronic vehicles – Ban on ICE or electrification: Norway 2025; 9 countries + UK 2030; US, China & Japan 2035; others 2040, 2045 and 2050. There is also the discovery of crude oil in an increasing number of African countries whose oil policies are more investor friendly. 

“If Nigeria sincerely wants to get out of dependence on crude oil dependence and the woes this has brought since the petrodollar began flowing in 1974, some courageous steps must be taken. We must understand that this is not a financial and financing matter. Removing or reducing the exchange rate premium won’t solve it.

“Taking accommodation with IMF won’t do it either Ghana has done that 17 times and yet, the Ghanaian Cedi is not a super currency today. The fundamental issue is that we are producing the right things and we are not producing enough. We look more outside of Nigeria for redemption, whereas the solution to most of our problems lies within. Looking inwards preserves. We must deliberately align policies across fiscal, monetary, commercial, and industrial planks, ”he said.

While Identifying sources of foreign exchange earnings, he listed proceeds from oil exports, proceeds from non-oil exports, Foreign Direct and Portfolio Investments as well as Diaspora remittances, which have increased from $6 million per week in December 2020, to $100 million per week by January 2022.

On how the CBN interventions have been beneficial to the economy, he said, “In 2020, as was in 2016, Nigeria went into stagflation. Whilst it took 5 quarters, to 2017 to exit the recession, in 2020 it took only 1 quarter. This was so because of the quantitative Monetary Policy Intervention (N3.5tr) and fiscal intervention (Economic Sustainability Plan – N2.3tr of which CBN was to contribute N1.5tr). The supply chain disruption, pervasive insecurity, staff retrenchment, and high levels of unemployment meant that more people could have died of hunger and starvation than insecurity and COVID-19 put together. 

“But CBN Anchor borrowers programme stopped it. The result was 4.5m farmers accessing credit of N945 billion without collateral; 5.2m hectares of crops planted and intervention on 21 value chains. Targeted credit facilities of N368.79b (as of Feb 2022) reached 648,052 households and 130,00 MSMEs to support aggregate demand as N1.452trillion of real sector support facility went to boost 337 companies, real sector output, complemented by N134.63b AGSMEIS programme benefiting 37,571 MSMEs.”