Nigeria’s commodity curse – and blessing

Plunging oil prices is synonymous with economic and political instability in oil producing nations. In Nigeria, the falling oil prices translate into an increased difficulty for the nation to balance its budget and maintain its currency’s value, forcing a burn through the often capricious oil savings to stave off a crisis.

Paradoxically, this time around, this could be good for the economy over the medium term, as it necessitates a serious impetus for the implementation of innovative policies to diversify the economy.

Presently, oil and natural gas account for 35 percent of Nigeria’s GDP, 80 percent of total government revenue and 90 percent of exports. Even the annual budget is based on projections of oil prices and quantity expected to be sold – both declining numbers.

In its latest forecasts, the IMF’s predictions for the Nigerian economy in 2015 have been cut—from over 7 percent growth to about 5 percent.

With oil prices plunging by about 60 percent from its 2014 high, and in such a short period of time, clearly, Nigeria‘s finances are in a vulnerable state.

Untapped revenue sources

Nigeria still has much untapped revenue sources, ranging from the solid minerals to agriculture, and everything in between.

Investments in mineral resources could generate revenues from multiple minerals from multiple states across the entire nation. The global demand for solid minerals such as industrial, metallic, exotic gemstones and rare earth minerals has been increasing globally.

Additionally, Africa’s largest economy and most populous nation has a sprawling and vibrant services sector, which captured a share of 51 percent of the economy based on rebased GDP figures.

With increased investments in manufacturing, construction, power, entertainment and the arts, this could be a strong driver of revenue growth for the economy.

The government has also put in place an ambitious agricultural policy that seeks to transform the sector into another foreign revenue driver.

Taken together, these show that the country has enough resources to replace declining oil revenues.

Samir Gadio, Head of Africa Strategy, Standard Chartered Bank, touched on the diversification of investments in the economy in a recently released report, saying, “While the oil and gas industry has historically accounted for the bulk of FDI, it appears that the share of non-oil and gas inflows has increased in recent years.

Planned projects in the transportation, construction, refinery and petrochemical sectors should gradually materialise, and investment in the power sector is likely to pick up further over time.”

Political Will

Aliko Dangote, industrialist and Nigeria’s richest man, said at a recent breakfast meeting, “we should try to enhance our export base. Attention should be given to major areas that need foreign exchange. Also there should be time limit for certain things to be imported into the country.

“Thereafter, government can stop such importation. Very soon, the CBN will not give us money for sugar importation; say in the next four years. We would be the highest foreign exchange seller in this country by 2018.”

Expanding the export base has been an obvious need for a long while. However, the lack of a political will has impeded the implementation of strategy to this effect.

The lack of a political will stems from the quick benefits of the oil windfall. Essentially, investment in the oil sector crowds out investment in others. This dependence on oil and its FX inflow renders other exports uncompetitive.

Dutch Disease

Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency.

According to Håvard Halland, natural resource economist at the World Bank, in an Economonitor article, “Developing countries stricken with the Dutch disease tend to perform worse than their non-exporting counterparts in rule of law, income distribution and overall good governance.

“Populations concentrated around resource-rich areas develop rent-seeking behavior and enjoy much higher standards of living than the rest of the country, thereby increasing intra-state tensions.”

In Nigeria, agriculture accounted for 51 percent of exports in the 70s. Currently, the oil and gas sector accounts for 90 percent of exports.

At the same time, regional inequality has widened, with a thriving South having rising income levels, lower unemployment and better educated citizens, alongside a lower income, less educated and vastly unemployed North.

According to Halland, the case for Nigeria to move away from its oil addiction is quite attention-grabbing. It just needs the political will to see through structural reforms – falling oil prices can do just that.

YINKA ABRAHAM