The latest foreign trade data show that Nigeria recorded a trade balance of N6.52 trillion in the second quarter of this year, according to the National Bureau of Statistics (NBS). Expectedly, President Bola Tinubu seized on the figure as evidence that his economic reform was working, saying the trade balance “underscores the increasing positive shifts in the economy over the last year.” Given that the positive trade balance significantly reversed the negative balance of minus N1.4 trillion recorded in the fourth quarter of last year, Tinubu should be cut slack. After all, a trade surplus, any trade surplus, is better than a trade deficit!
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However, dig deeper, there’s little to gloat about: for nothing has changed in the structure of Nigeria’s export trade. Crude oil exports, at N15.5 trillion, account for 80.8 per cent of the total exports. If you add other petroleum oil products, including natural gas, at N1.9 trillion or 9.92 percent, oil and gas represent 91 percent of Nigeria’s total exports. Thus, non-oil exports, at N1.8 trillion, account for a minuscule nine percent of Nigeria’s total exports. Surely, then, Tinubu’s economic reform has done nothing to change the structure of Nigeria’s export trade, which remains almost totally dominated by oil and gas.
That said, however, Tinubu’s economic reform contributed to the admittedly huge trade surplus in one significant way: the massive devaluation of the naira. One effect of naira’s devaluation is that the foreign exchange, usually in dollars, that Nigeria earns from exports translates into large amounts in naira. Another effect of a devalued currency is that it makes a country’s export products cheaper, which means foreigners could buy more of them.
Take those two effects together, it is thus not surprising that as the value of the naira crashed from N460/$1 in March 2023 to N907/$1 in December 2023 and then to N1,625/$1 since March 2024, the value of Nigeria’s exports rose correspondingly. For instance, the total exports of N19.1 trillion in Quarter 2 of 2024 reflected a 51 percent increase over the total exports of N12.7 trillion in Quarter 4 of 2023 and a 195.5 percent rise over the total exports of N6.5 trillion in Quarter 1 of 2023. Put simply, the steep devaluation of the naira has significantly increased the value of Nigerian exports in naira terms.
But here’s the critical question: Given the negative effects of currency devaluation, such as imported inflation, are increased exports of crude produce and raw materials, with an associated increase in naira earnings, a good trade-off for a weak currency? The answer is no. Adam Smith famously said in The Wealth of Nations: “No nation is ever rich by the exploitation of the crude produce of the soil but the exportation of manufactures and services.” And he is right. Why? Well, crude produce and raw materials are notoriously cheap. By contrast, finished products are far more expensive because of value addition and therefore earn a country a lot more foreign exchange than raw materials. Thus, as Adam Smith rightly said, no nation can ever be rich by exporting predominantly crude produce and raw materials.
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Unfortunately, Nigeria is stuck in the rut as an exporter of predominantly crude oil and raw materials. As noted earlier, crude oil and natural gas accounted for 91 percent of Nigeria’s total exports in Quarter 2 of this year. And out of the remaining nine per cent accounted for by non-oil exports, only 1.4 percent or N269bn were manufactured goods. The rest was dominated by unprocessed agricultural goods at 5.4 percent or N1 trillion and raw materials goods at 1.84 percent or N352.8bn. So, Nigeria is not turning its natural resources into finished products before trading them onwards. That can never ever make it a rich nation!
“First, Nigeria cannot even produce enough crude to meet its OPEC quota, thanks to infrastructural decay, pipeline vandalism and massive oil theft, with over 80 percent of crude production being stolen.”
But, let’s face it, being a petrostate poses monumental risks for Nigeria. Two stand out. First, Nigeria faces an utterly bleak economic future if it remains solely dependent on crude oil exports. Second, by entrenching itself as a hydrocarbon economy, Nigeria is turning its back on the next energy transition, with dire consequences. The latter is a subject for another column. The focus here is the economic catastrophe of Nigeria’s oil dependency.
Recently, the Financial Times produced a film titled: “Can Nigeria end the ‘oil curse’?” Interviewed in the film, former President Obasanjo said: “We now live on oil, sleep on oil, eat on oil, which is unfortunate”. Yet, that was not always the case. Before and up to the first decade of Nigeria’s independence, the country had a diversified export base. But that changed since 1974 when oil dominated Nigeria’s exports, accounting for over 90 per cent. Three factors have been blamed for the seismic shift in the structure of Nigeria’s export trade.
The first is called “Dutch Disease”, which arose because as oil money flowed into Nigeria, the naira became artificially overvalued, making producing and exporting goods unattractive as exports were extremely expensive. At the same time, naira’s overvaluation made imports cheaper and, thus, shifted the country’s focus away from producing and exporting goods to simply importing them. The second is called “resource curse”, meaning that oil wealth bred massive corruption instead of being used to develop Nigeria’s industrial capacity. Oxfam, the international NGO, estimates that, between 1960 and 2005, about $20 trillion was stolen from the Nigerian treasury by public officials. The third factor is that an oil-based economy has created a huge population of rent-seekers and arbitrageurs, who are simply buying and selling crude and refined products, with few people engaging in productive activities that will grow the economy, create jobs and generate tax revenues for the country.
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At the FT film ended, the question was posed: Has oil been a curse or a blessing for Nigeria? Answering the question, the CEO of an indigenous oil company said: “Oil has been a blessing to Nigeria,” adding that “it can be a bigger blessing for the future.” Given his stake in the sector, he would say that, wouldn’t he? He is certainly one of the very few Nigerians who have benefitted from the country’s oil, while most Nigerians are struggling to make ends meet. In contrast, answering the same question, Aanu Adeoye, FT’s West Africa Correspondent, said: “Personally, I feel that oil has been more of a curse than a blessing.” He argued that oil had taken over the national psyche “so much that it kind of led to a lack of imagination.” That lack of imagination is a major reason Nigeria remains a monoculture economy, utterly dependent on crude oil exports.
But the chickens have come home to roost. First, Nigeria cannot even produce enough crude to meet its OPEC quota, thanks to infrastructural decay, pipeline vandalism and massive oil theft, with over 80 percent of crude production being stolen. With about 1.5 million barrels of oil a day, Nigeria is the 15th top oil producer in the world. Compare Nigeria’s 1.5mb/d with the United States’ 29.9 mb/d and Saudi Arabia’s 11.1mb/d. As David Pilling, FT’s Africa Editor, said in the film, “2 million barrels of oil is not enough to make 200m people rich.” Think about it: can even 3mb/d enrich a country with an ever-growing population?
Yet, a far more existential threat is global peak oil demand as the world turns to renewables and electrification. Indeed, according to BP in 2023, demand for crude oil may have peaked, while Goldman Sachs believes the peak is still a decade away. Whatever the accurate timing of the global peak oil demand, the truth is, unless Nigeria diversifies its export base away from crude-oil dependency, it faces a dire economic future!
