Expert urges Nigeria to diversify its economy, break free from oil

Viisuas Consulting, a data consulting firm based in Abuja, Nigeria, has strongly recommended urgent measures for economic diversification in Nigeria. The key advice is to reduce the country’s heavy reliance on oil revenue, an issue that needs immediate attention to enhance the nation’s revenue-to-GDP ratio.

In a recent post on its X page (formerly Twitter), Viisuas highlighted the critical importance of addressing this economic challenge. The urgency stems from the fluctuating prices of crude oil, with Brent crude ranging between $80 and $85 per barrel and WTI crude between $73 and $76 per barrel over the past five months.

The advisory underscores the impact of this reliance on oil on the government’s revenue, affecting its ability to fulfil essential obligations, especially in defending the naira amidst its unprecedented decline in the foreign exchange market.

The repercussions of over-reliance on oil are not just economic but also institutional, giving rise to issues such as political interference and corruption. These challenges have the potential to continue affecting Nigeria’s economic and political future adversely.

Viisuas Consulting emphasises the need for immediate action to break free from these patterns and encourages the implementation of diversified economic strategies for a more stable and sustainable future for Nigeria.

It tweeted, “A significant portion of the country’s challenges can be traced to its heavy reliance on oil as a source of revenue. This dependence has led to institutional problems, political interference, and corruption.”

The data consulting company is worried about the country’s low total revenue compared to its GDP, ranking it among the worst globally.

Even though there have been significant investments in non-oil sectors, they haven’t contributed enough to boost the overall GDP as much as the oil sector.

Nigeria’s Tax-to-GDP ratio

According to the Organization of Economic Cooperation and Development (OECD), Nigeria had one of the lowest tax-to-GDP ratios on the African continent.

In its report, titled “Revenue Statistics in Africa: Key Findings for Nigeria,” the OECD admitted that its 0.6 percentage point drop within a span of 10 years between 2010 and 2021 was way lower than the African average of 1.5 percentage points.

The OECD said, “The tax-to-GDP ratio in Nigeria increased by 1.1 percentage points from 5.5% in 2020 to 6.7% in 2021. In comparison, the average for the 33 African countries within the Revenue Statistics in Africa 2023 publication has remained unchanged over the same period and was 15.6% in 2021.

“Since 2010, the average for the 33 African countries has increased by 1.5 percentage points, from 14.1% in 2010 to 15.6% in 2021. Over the same period, the tax-to-GDP ratio in Nigeria has decreased by 0.6 percentage points, from 7.3% to 6.7%. The highest tax-to-GDP ratio reported for Nigeria since 2000 was 9.7% in 2011, with the lowest being 5.3% in 2016.”

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Nigeria’s oil revenue to GDP

Taking a closer look at a Statista report titled “Contribution of the Oil and Natural Gas Sector to Nigeria’s GDP from Q4 2018 to Q2 2023,” reveals a decline in oil’s contribution to government revenue. Despite the country’s gradual recovery from the effects of the coronavirus, this progress has been hindered by challenges in the oil sector, including issues like oil theft and more.

It read, “Between October and December 2020, the oil industry contributed 5.9 percent to the total real GDP, a decrease of roughly three percentage points compared to the previous quarter. In the second quarter of 2023, the contribution of the oil sector to the country’s GDP reached 5.34 percent.”

Viisuas’ call is supported by these concerning data, emphasizing the need for immediate actions to tackle the government’s revenue challenges.

It tweeted, “Nigeria also has one of the lowest revenue-to-GDP ratios globally, leaving its fiscal position vulnerable to economic shocks. In 2021, general government revenue in Nigeria was a mere 7.3 percent of GDP, less than half the average country within the Economic Community of West African States (ECOWAS) and just about a third of the average in Sub-Saharan Africa. This placed Nigeria at 191st out of 193 countries worldwide for revenue generation.”

As both oil and non-oil revenues face a decline, the consulting firm is urging the government to make substantial investments in the non-oil sector. This move aims to alleviate the country’s heavy reliance on oil.

Charles Enaeya, an economist and founder of Researchitlive, echoed Viisuas’ sentiments in a conversation with BusinessDay. He emphasised the need for the government to reconsider its strategy, especially given the current economic challenges marked by high unemployment, record inflation rates, and a foreign exchange crisis.

He said, “Viisuas is correct; it’s high time we as a country get serious about developing our non-oil sector infrastructure so that we don’t constantly expose ourselves to the external shock that the dwindling return from oil activities brings us.”

Monday Idemudia, a retired civil servant and ICAN lecturer, expressed alignment with the consulting firm’s perspective. He criticised the government for not allocating sufficient resources to foster the growth of our non-oil sector.

Idemudia pointed out that despite the noticeable progress in agriculture during the last administration, the government has neglected to unlock its full potential. He particularly highlighted the need to address the prevailing insecurity in the country, which disproportionately affects farmers.

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“I agree with the Viisuas,” Idemudia said. “However, I want to call on the government to invest enough resources to solve issues surrounding poor investment in the agricultural sector and insecurity, especially.”

An anonymous financial expert, aligning with Viisuas, recommended that the government focus on enhancing its tax-to-GDP ratio as a means to tackle the issue of excessive dependence on oil.

“I also agreed with Viisuas because if you look at the impact our foreign reserve is having on the economy, you will agree with me that we have to start investing seriously in the non-oil component of our revenue and also in our tax collection,” the analyst said.

The analyst commended the recent initiatives undertaken by Taiwo Oyedele, the Chairman of the Presidential Committee on Fiscal Policies and Tax Reform. Rather than increasing the number of taxes, Oyedele’s approach involves investing more resources in tax collection and expanding the inclusion of additional people into the tax bracket.