For many years, especially after the lengthy collapse in global oil prices that started in 2014 and culminated in Nigeria’s first economic recession in a quarter of a century in 2016, the talk of diversification has been rife in Africa’s biggest economy.
On the surface, the economy looks diversified with agriculture contributing the single largest share to GDP, followed by Trade and Information and Communication Technology (ICT) contributing about half of GDP.
Despite that however, the oil sector which contributed less than 8.93 percent of the Q2 GDP, seems to have more control over the economy than the GDP contribution numbers suggest.
That’s largely due to structural imbalances in an economy where crude oil exports account for over 50 percent of foreign exchange earnings and government revenue.
Diversifying the structural base of an economy is a long process and can’t happen overnight but what is important is to have a clear sense of what is required to achieve it and the willingness to follow through with the necessary reforms that can make it happen.
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Data compiled by Business Day show that the process has been particularly slow for Nigeria which has been hit this year by the double whammy of the COVID-19 pandemic and lower oil price.
1) Non-oil sector contribution to GDP is at a 5yr-low
The table above shows that the oil sector’s contribution to GDP hit a five year-high in 2020 (H1) while the non-oil sector, though still dominant, made its lowest contribution to GDP in same period.
The non-oil sector has averaged over 92 percent in the five year period while the oil sector has averaged 8 percent.
Data sourced from NBS GDP reports
2) Non-oil sector growth has been stagnant
SOURCE: Nigeria Gross Domestic Report (Q2 2020) NBS
The 2015 crash of global oil prices explains the sharp decline in the growth of the oil sector in 2016. Despite the talk about developing the non-oil sectors of the economy, the non-oil sector recorded little to no growth and even experienced negative growth in Q3 2017.
As the economy began to stabilise in 2017, the growth of the oil sector skyrocketed, far surpassing the non-oil sector.
The non-oil sector recorded higher growth rates than the oil sector from Q2 2018 to Q1 2019. However, this is no indication that the non-oil sector performed well, the oil sector just performed worse; recording negative growth rates throughout the period.
The non-oil sector, over this period, did not achieve up to 5 percent growth and it is unlikely that such a feat would be recorded in 2020. Both sectors have declined into the negative as at Q2 2020 as a result of the economic implications of the coronavirus pandemic.
3) Non-oil exports struggle to wrest oil dominance
*Q2 2020
Data sourced from NBS Foreign Trade in Goods Statistics reports
The value of oil exports as a percentage of total exports has outperformed non-oil exports every year since atleast 2015, according to NBS data.
However, there has been a general decline in the proportion of exports contributed by oil exports, with the lowest points recorded at 71.40 percent in 2015 and 70.01 percent in Q2 2020 which can be attributted to the crash in global oil prices in both years.
The performance of non-oil exports have however remained relatively poor.
Altough non-oil exports began an upward climb in 2018 and appears to have maintained the trend to its current peak of 15.90 percent, that may be more to do with the decline in the contribution of oil exports rather than a sigifcant jump in the value of non-oil exports.
Nevertheless, there has been some progress recorded, but it should be approached with caution as it is only a 3.90 percent increase from the performance in 2015.
4) Oil maintains stranglehold of government Revenue
Data sourced from CBN Draft 2018 Annual Report
The structural imbalances facing the nation are further highlighted when government revenue is analysed.
The oil sector has generated over 50 percent of government revenue since 2015 and although the figure is down from around 70 percent in 2012, non-oil revenue has struggled to measure up to oil revenue.
The exception to the dominance of oil exports was in 2016 when non-oil revenue exceeded oil revenue by 4 percent, but that also had more to do with the decline in the value of oil exports amid lower global prices and production shut-ins in 2016.
As was the case with the sector growth rates, this is no indication that there was an actual improvement in the revenue generated from the non-oil sector; the oil sector just performed worse.
In actuality, the data from 2016- when non-oil revenue outperformed oil revenue- shows that non-oil revenue did, in fact, underperform with a 5.2 percent decrease from the level in the previous year, 2015. The false perception of success was simply created by the greater decline of 29.7 percent in oil revenue from the level in the previous year, 2015.
Data sourced from CBN Draft 2018 Annual Report
The CBN is yet to publish official numbers for 2019 but government critics say Nigeria has done little in terms of reforms to beef up non-oil revenue. For instance, they point to the slow approach of government towards privatisation and concession of some idle government assets as well as the slow progress made in improving the ease of doing business and tackling the country’s myriad of infrastructural challenges.
Based on the available data, Nigeria’s diversification efforts have been too little to yield the required result as the changes recorded still appear to be influenced by external fluctuations.
Instances where the gaps between the oil and non-oil sector appeared to have reduced, were more as a result of a decline of the oil sector than growth of the non-oil sector.
As it stands, the revenue diversification process is quite slow and Nigeria is still an oil-driven economy. Efforts need to be revisted to be more proactive and well-suited to the nation’s peculiarities than reactive or misaligned.
