Oil shocks: Why Nigeria economy will continue to convulse, By Foster Obi

Posted by News Express | 14 May 2020 | 790 times

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•Foster Obi

Analysts sometimes describe Nigeria economic managers as lazy.  This is understandable when you consider that successive governments have solely relied on oil as the economic mainstay of the country with little regard for other sectors. Any wonder that the economy bleeds when oil gets a hit.

Nigeria, a member of the Organization of Petroleum-Exporting Countries (OPEC), is an exporter of the coveted bonny light and medium-grade crude oil. The oil price shocks of 1973-74 and 1979 resulted in a large transfer of wealth to Nigeria. Public expenditure increased greatly, as did the country’s access to international capital markets. Evidence of “Dutch disease” emerged during this period as interest in agriculture, the main non-oil tradable sector, declined. Dutch disease is a concept that describes an economic phenomenon where the rapid development of one sector of the economy (particularly natural resources) precipitates a decline in other sectors.

At Nigeria’s independence in 1960, agriculture was the stronghold of her economy. According to Timon Ilugbuhi (1968), peasant agricultural production for export provided the stimulus to Nigeria’s overall economic growth. Agriculture provided employment to over 75% of the population and accounted for over 70% of total food consumption. It also provided raw materials for industry, export earnings to finance imports and foreign exchange.

At the peak of the oil boom, it was obvious that Nigeria, hit by the bug, had abandoned agriculture for fleeting wealth.  Ismaila Abdullahi (1981) observed: “Nigeria can no longer produce enough food for its fast growing population neither could the (then) agricultural system cope with the increasing demands of the agricultural raw materials to keep the country’s oil mills, textile nor other agro-based industries operating at full capacity let alone have surpluses for export.

“In fact, many of the agro-based industries which once depended on locally produced raw materials were closing down unless of course they were allowed to import part or all of these raw materials from abroad. Numerous other parameters point to the obvious and undeniable fact that the country was ‘progressively’ becoming unable to cope with the overall needs of its food and raw materials.”

Over the years, several authors attributed the decline in Nigeria’s agricultural production to the neglect of the agricultural sector as a result of the oil boom. They include Abdullahi, 1981; Luke Okojie, 1991; Adeniyi Osuntogun, 1997; Chukwuemeka and Nzewi, 2011; and Izuchukwu, 2011, amongst others.  Their studies showed that the period of the apparent decline in Nigeria’s agricultural production coincided with that of the oil boom.

Like a demonic affliction, every regime in Nigeria has focused on oil, ignoring the danger signals. To worsen matters, gluttonous and dare-devil politicians have swooped on this natural resource, siphoning the proceeds for them and their unborn generations.   

From research, the most provocative policy of the Nigerian government was the dependence on oil resources as a source of foreign exchange earnings to the detriment of agriculture. However, the collapse of oil prices in 1986 produced severe consequence such as a shift in the global economy that triggered a crash of the stock market, soaring inflation, and high unemployment rate in Nigeria. By implication, the dependence on oil revenue to finance national development has made the Nigerian economy highly susceptible to oil price volatility.

This, without mincing words brought us to where we are today.  Regulatory authorities said that Nigeria’s economy is projected to contract by 3.4 percent this year as dwindling oil revenues and the new Corona virus forced it to cut budget plans for a second time, assuming a lower petroleum price of $20 per barrel.

Nigeria, which emerged from a recession in 2017, was already contending with low growth of about 2 percent before oil prices plummeted. Africa’s top oil exporter relies on crude oil sales for about 90 percent of foreign exchange earnings and more than half of government revenue.

As a result of the fall in the world demand for crude oil and crude oil prices, the OPEC+ meeting and negotiations to cut oil production fell through and started a struggle for market share between Russia and Saudi Arabia. The refusal of Russia to cut oil production spurred Saudi Arabia to increase production to about 12.3 million barrels per day starting from April the 1st. Russia, in retaliation, increased its output by 500,000 barrels per day. This disagreement pushed oil prices down by the most, since 1991.

This retaliatory ping-pong caused a fall in the Brent crude by more than 20% on March 9 and even led to the biggest one-day calamity of the US Stock Market.

For China, the incidence of Coronavirus slashed their oil demand by more than 20%, leading to excess crude oil in the global market begging for prospective buyers, and then, a crash in its price.

Nigeria started this year projecting it would sell oil at $57 a barrel, then it revised that down to $30 a barrel, and then $20. According to the International Monetary Fund (IMF), oil revenues will decline by $26.5 billion this year, down from $54.5 billion in 2019.

Ben Akabueze, budget office director-general, said oil revenues were expected to fall by more than 80 percent. He said the government had revised its projections and expected the economy to contract by 3.4 percent this year compared with its previous expectation that it would grow by 2.9 percent.

Nigeria would speed up marginal field licensing and oil mining licence renewals to try to raise revenues, Akabueze said. The economic managers on a webinar call recently discussed the issue of Nigeria’s debt servicing costs, a week after the country shelved plans to borrow 850 billion naira ($2.36bn) from international markets and instead tap domestic markets to finance the budget.

Experts predict imminent job losses across the petroleum industry. It is also believed that the impact of this will start reflecting from June and July.

Another concern in Nigeria is that a period of economic distress could lead to a return of social unrest that dogged the country as recently as 2016. The Niger River Delta, at the heart of Nigeria’s crude production, has suffered bouts of militancy and violence for years, with oil facilities targeted by people claiming they were unfairly treated by the government and big oil companies.

“A concern is social stability in oil-producing areas as weaker government support and rising unemployment lead to social discontent,” said Jeremy Parker, head of business development for West Africa at Citac Ltd. “There is a risk that this could lead to spikes in incidences of politically-motivated vandalism or theft, leading to production disruption.”

Nigeria could see its economy collapse, while all offshore production would be loss-making if oil prices remain suppressed into the teens over the long term.

Anyhow you look at it; Nigeria’s road to economic recovery as a result of the present predicament is not a tea party.

Proponents of diversification for Nigeria to get out of regular economic woes recommend three major areas:

Modernise the Agricultural Sector: Their argument is that in many rural communities, agriculture is still traditional. This challenge thrives due to the lack of modern technologies, access to information on crops, weather conditions, credit facilities and market opportunities as well as poor education. Innovation in the agricultural sector should serve to empower farmers by making technology, information and credit accessible.

Develop the Tourism Industry: Nigeria is endowed with rich natural ecosystems and cultural diversity that could be harnessed to drive economic diversification. Following the Rose Revolution in 2003, the Republic of Georgia remodeled its economy with a focus on building a capitalist economy where tourism plays a vital role in economic transformation. The United Arab Emirates has demonstrated the impact of tourism development in national transformation. Dubai has transformed into a modern economy and an attractive investment haven engineered by tourism.

Promote Entrepreneurship: Transforming the resource curse requires the government to redefine its role in economic transformation and its strategic relationship with the business sector. Using entrepreneurship to drive economic diversification would require education reform. Education must be enterprise-oriented, such that inspire creativity and innovation. The government, in collaboration with the private sector, should create the incentives for students to turn creative ideas into inventions that have an enterprise value. Such reform would encourage young Nigerians to harness their entrepreneurial spirits and compete based on the power of their ideas rather than the monopoly of violence.

These three areas are obviously not exhaustive. While the present regime has made some efforts towards agriculture, reliance on cheap oil money is still overpowering. Steps by the Central Bank to promote entrepreneurship are still rudimentary. Until the government takes a radical step to break away from oil dependency and invest heavily on sectors like tourism while promoting entrepreneurship beyond showmanship, so long will the economy, already faced by a double whammy, according Finance Minister, Zainab Ahmed, continue to convulse.

•Foster Obi is Deputy Editor of News Express Media Group.

Source: News Express

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