For many years, Nigeria was the star student in the “How to Put All Your Eggs in One Basket 101” class and she is currently reaping the rewards of her success. The Nigerian economy, especially the public sector, has been dependent on revenue from crude oil exports. As one of the top 10 oil producers in the world, previous administrations focused only on the oil sector as they believed that global economic growth would fuel the incessant demand for crude oil which would in turn guarantee sustained high prices.
Slowing global economic growth in China, the world’s largest importer of crude oil, the advent of shale oil in the United States and the refusal of the Organisation of Petroleum Exporting Countries (OPEC) to cut down on supply have all contributed towards halving crude oil prices, starting from June 2014. The deal agreed by the world's major powers to lift sanctions on Iran’s ability to export crude oil could further add to the supply glut and keep oil prices down.
As a result, growth and activity in the Nigerian economy has stalled as low oil prices have shrunk government revenue and negatively affected growth and profitability in the economy. With no other major export, the Nigerian government has been forced to increase borrowing to make up for the shortfall in revenue. According to the Debt Management Office, as at June 30th, total debt stock was ₦12.12 trillion, up 7.83% from the December 31, 2014 figure of ₦11.24 trillion. The current predicament Greece is in should be a lesson on how fiscal irresponsibility can result in debt spiraling out of control.
A Cloud of Macroeconomic Uncertainty
In addition to the effects of low oil prices, macroeconomic uncertainty has persisted as the Presidency announced that it would not make any key ministerial appointments until September. It intends to root out corruption, establish the framework for good governance and identify the most qualified candidates before making any appointments. While the intent is to be commended, the economy is at a standstill and investors are unwilling to invest in Nigerian financial markets due to the uncertainty surrounding national economic policy.
Major Economic Metrics Give Little Cause for Optimism
The dire condition of the Nigerian economy due to the fall in oil prices has been highlighted by weaker economic indicators. After recording quarterly GDP growth of over 6% in the first three quarters of 2014, the effect of the slump in global oil prices was noticed in the last quarter of 2014 where GDP growth fell to 5.96%. This trend persisted in the first half of 2015 as, figures released by the Nigerian Bureau of Statistics (NBS) show that annualised growth fell to 3.96% in Q1 and even further down to 2.35% in Q2. The dip in oil prices has made it even more essential for the new administration to establish economic policies that encourage the diversification of the economy.
Slower GDP growth sets the tone for more worrying economic metrics. The inflation rate has been constantly increasing and is currently at 9.2% as the relative scarcity of refined petroleum products has driven food prices upwards. The CBN’s decision to ban access to US Dollars in the interbank market for the importation of several items threatens to create shortages in the economy, leading to even more inflationary pressures.
The unemployment rate rose from 7.5% in Q1 2015 to 8.2% in Q2 2015. While this figure may seem acceptable when compared to 5.3% and 5.6% in the US and UK respectively, further analysis shows that the level of full employment and underemployment fell by 2.37% and 11.16% respectively.
Despite Nigeria’s vast human and natural resources, economic mismanagement has left us unable to create adequate employment for the labor force and exploit all of Nigeria’s natural resources. The groundnut pyramids in Kano and the textile industry that once employed over 1 million people are examples of vibrant industries that have been abandoned since the discovery of oil. Meanwhile, Nigeria's youth remain largely untapped as a resource.
The Road Ahead for Crude Oil Prices
The Nigerian economy remains vulnerable to changes in crude oil prices as we derive 70% of export revenue and 90% of foreign exchange earnings from crude exports. Brent Crude, the international benchmark for crude oil prices, is currently priced at about $49 per barrel, below the $53 per barrel benchmark set for the 2015 national budget.
According to the most recent International Monetary Fund commodity report, there is a 10% likelihood of Brent crude oil prices falling below $40 in the next 12 months. Without further diversification of the Nigerian economy, crude oil prices below $40 will lead to more borrowing and economic growth will be further curtailed.
As a country whose economy and national budget has always been dependent on revenues from high crude oil prices, we are currently in uncharted territory. The lack of diversification in the economy has put us in a precarious position where economic growth is largely dependent on one resource.
With a new government in place, it is encouraging to see that plans have been put in place to clean out the inefficiencies in the oil sector, get refineries back online and most importantly diversify the economy and Federal Government revenue sources so that the country does not become overly reliant on borrowing. As the government looks to diversify the economy it should go back to agriculture, especially cash crops such as cocoa, cotton, groundnuts, oil palm products and rubber which formed the majority of Nigeria’s exports until crude oil surpassed them in the 1960’s.
Significant investment and stellar leadership will be needed to diversify the economy and increase production to amounts that will cater to the needs of the populace – thereby reducing the need to import – and still have enough to export.