The sudden resurgence of the word diversification in our economic literature, as the effect of China’s Corona virus takes its toll on the economy, reminds me of the old-time amusement park ride on a merry-go-round, where children sit and enjoy rides on plastic horses revolving about a fixed centre.
Diversification simply put, is the process of shifting an economy away from a single income source towards multiple sources from a growing range of sectors and markets. Nigeria continues to live in disillusion of its intended reality to get back to its enviable position in the league of nations as one of the top net exporters of agricultural produce in the 60’s, a status that kept it self-reliant and self-sufficient. But how has the mighty fallen, no thanks to the discovery of crude oil in 1956, in the Niger-delta, which was meant to be a blessing to the nation, instead has become a resource curse due to high level of mismanagement. Government over time had relied on petrodollar to fund their growth and development plans, thereby leaving the other productive sectors of the economy to suffer.
However, the recent developments in the global oil market has revealed the price elasticity and volatility of crude oil ranging from the discovery of shale oil in the US, non-compliance of OPEC member countries to regulation and the discovery of new wells across non-traditional oil producing nations. Needless to talk of the impacts of territorial politics, natural disaster, war and economic sanctions. All has a role in the determination of the crude oil price.
I was perturbed seeing a report by one of the national dailies stating the plan of the Ministry of Mines and Steel Development to boost the mining industry’s contribution to GDP from 0.3 percent to 3 percent as part of the government’s drive towards economic diversification. This leaves me to wonder about what we have been doing as a nation at least from the last recession witnessed in 2016 when crude oil traded for as low as $34 per barrel (pb), which reveals the extreme volatility of the Nigerian economy as a result of its over dependence on crude oil. I would expect to see a more radical increase in the non-oil sectorial performance and contribution to GDP, with the way the gospel of diversification was spreading as at that time and many analysts and thought leaders coming out as proponent of this age-long economic principle as the way forward to remedy the nation’s destiny whose glory has been baptized by immersion in the pool of oil.
With popular hashtags such as #buynaijatogrownaira, #madeinnigeria, and a host of others, one would think that we have learnt our lesson, given the devastating effect of the crash in crude oil price on our economy when oil price fell from the height of $112pb recorded around 2014 to less than $39pb in 2016. The government was prudent in drafting the 2016 appropriation act by lowering the benchmark price to $38pb at a time the product was trading at c$56 pb in 2015. Few days after the 2016 budget was released, it fell to $34pb, a 400-basis point deviation from the budget. It was then everybody knew that the oil party was over, the economy that was once buoyant and acclaimed “Giant of Africa” slid into recession.
Since the outbreak of Corona virus in the city of Wuhan in China, Nigeria seems to be one of the worst hit of the nations of the world as the impact cuts across various sector of the economy considering the relationship between the two countries, ranging from exportation of crude oil to importation of basic amenities, labour and infrastructure. Our fiscal institutions were not left out in the marriage between Nigeria and China as the ministry of finance is in the process of securing a $17 billion loan from the China-Exim bank to be used for the funding of infrastructure projects in the country.
Of the world’s total crude oil consumption of 93 million barrels per day, China consumes 13.5m bbl./day, which is 14.5 percent of the world’s consumption, making it the second largest consumer of crude oil in world after the United State of America with average daily consumption of 18.5m bbl./day, accounting for 20 percent of total world’s consumption. These statistics no doubt explains the reason for the continuous decline in oil price we have witnessed since the outbreak of the epidemics in China at the beginning of the year. Oil price opened the year with $64 pb and decreased consistently to $55pb by February 2020.
China has since cut down on demand for oil as economic activity has reduced and government’s effort geared towards combating this gruesome corona epidemic. Flight operations were shut down due to restrictions on movement in and out of the country, coupled with the elongation of their new year holiday. Consequently, there is a glut in crude oil supply as the demand from China declined.
On the domestic scene, China is the largest importer of Nigerian oil after India. This situation no doubt will leave the country in a precarious state if this condition is not remedied in good time. The impact is already weighting down on our foreign reserve which also continues to drop consistently, currently at $36.7 billion (liquid) compared to $37 billion recorded in December 2019 (liquid).
Production cut by OPEC is also imminent as a response to the dwindling oil price in order to keep the benchmark crude oil price competitive. This will lead to a double whammy effect on the Nigerian economy as the country grapples with the possibility of being hit by the twin blow of low oil price and production cut below the estimated level in the 2020 budget. Since oil remains the main stay of the economy, accounting for over 90 percent of foreign exchange from export, our foreign reserve will continue to fall as daily revenue from oil sales head south.
The capital market and the money market are not left out in this party. We are threatened by capital flight as foreign investors who are the major players and drivers of the market are faced with the decision of whether to run or stay considering the current state of affairs. The CBN restricted non-bank institutions from participating in the primary and secondary market OMO auction with the aim of spurring economic growth by directing funds to the real sector and lowering interest rate. However, the OMO auction was open to foreign investors in a bid to sustain US Dollar inflows by shoring up our reserves and reducing the currency devaluation fears.
Amidst this economic reality comes the age long rhetoric loaded with empty promises and national aspiration – diversification. At the heat of the economic recession in 2016 when oil price fell to a record low, all on the lips of the government was diversification which was also attested to by their body language. Four years down the line, the narratives never changed.
In a comment credited to the CBN governor in May 2019, he stated that Nigeria may slide into another recession if measures are not taken to tackle the high rate of unemployment and other economic crisis. In a similar vein, the World bank in December 2019, warns of another recession if oil price drops by 25 percent at the time when the Brent crude oil price was $60.8 bd.
How long are we going to depend on the foreigners to be major players in our economy? How long are we going to pray for disruptions in the middle east so that oil price can go up? Even though the government in defence claims that the economy is well diversified considering the sectoral contribution to the GDP, however the source of the revenue driving the economy remain undiversified. What we want is the diversification of the revenue source which translate to tangible results on the populace and not diversification in “tall talk”.
Remilekun Iwalehin
Iwalehin is a finance and accounting professional with vast experience in budgeting, financial and regulatory reporting, and treasury management.
