The Oil Recovery and Growth Plan?
The popular version of Nigeria’s economic history goes as follows: Accidental oil wealth led us to abandon previously thriving industries and develop Dutch Disease. Rather than transform our oil earnings into jobs, improved infrastructure or accumulated savings, we deployed it towards achieving superficial economic growth and fattening public officials.
Most people would agree this is not too far off the mark. So when the recently launched Economic Recovery and Growth Plan (ERGP) outlined the government’s intent on diversifying the economy and enabling private sector growth through improved infrastructure and institutions, many applauded. The plan is the current administration's blueprint for kickstarting Nigeria's economy.
I have previously argued that Nigeria needs oil to diversify. This seeming paradox is evident in the ERGP itself, especially the subtle emphasis placed on the outcomes in the oil industry and their outsized impact on the success of the plan. So the slow progress of petroleum industry reforms may sneak by many, but the developments in the oil sector could make or break the government’s economic agenda.
Putting oil wealth to a good use
The four-year ERGP is supposed to follow the 2016 Budget example of not relying on oil earnings – a primary cause of our long-term economic issues. While it accomplishes this to an extent, digging a little deeper reveals a significant and unwavering oil reliance. For example, oil revenue as a % of GDP is expected to rise from 1.88% in 2017 to 2.01% in 2020. In comparison, non-oil revenue as a % of GDP is projected to fall within that period. Over the period, oil earnings should constitute over a third of government revenues, compared to less than a fifth in the 2016 Budget.
Those numbers make sense when you consider that the government is looking to increase daily oil production to 2.5 million barrels to increase earnings by ₦800 billion. And truth be told, all of this makes sense. It is a belated nod to the fact that 2016 was a year of deluded thinking and we need to leverage oil wealth to grow. Increasing non-oil revenue is vital in the long run but will take time. Encouraging whistle-blowing, reviewing tax credit incentives, and hiking luxury taxes are valiant first efforts but will barely scratch the surface. Obviously, now is not the time to relent on this front but in the meantime, oil earnings can help fund ERGP implementation.
The link between the long-term exchange rate and Nigeria’s oil sector
If anything matters more for Nigeria’s economy than government finances, it is the foreign exchange situation. The exchange rate has become a national obsession in the last two years, only calming slightly now that the CBN has started pumping dollars again. Somewhere in the ERGP is a resolution to sustain a market-determined exchange rate. But more prominent is a warning that this needs to be accompanied by "structural reforms" to the economy. These changes probably refer to the fact that Nigeria imports most of its primary food and energy needs. These tend to be demand inelastic, so currency depreciation means higher inflation and lower living standards for Nigerians. The government is determined to change this – the ERGP sets food and energy security as two of only five key execution priorities. In other words, becoming self-sufficient in those areas is high on their agenda.
How is this supposed to happen? On the petroleum front, this means our domestic refineries have to satisfy our petroleum product demand. Once again, we circle back to the oil & gas industry. Unsurprisingly, the ERGP resolves that the government should “revamp refineries to increase local production capacity”. Unfortunately, Nigeria’s refineries are a long-running joke. In 2016, refineries operated at just 14% of their 445,000 barrels a day capacity. Despite currency depreciation increasing the landing cost of petrol in the country, we continued to import because refinery output was nowhere near actual demand. The latest joke is that Dangote’s refinery will come and save the day. But that is unlikely to be ready before 2019. It’s hard to see how Nigeria will become self-sufficient in petrol anytime soon, even less so how we will achieve the ERGP target of reducing petrol imports by 60% by 2018. Without achieving this, demand for petroleum imports – and foreign exchange – will probably remain too high. In that scenario, would we still see a move towards a flexible exchange rate?
Will the oil sector halt its negative spiral?
Ignore the mainstream rhetoric of diversification, ERGP reality shows how important the oil sector will remain. 2017 GDP growth forecast is almost entirely oil-dependent, with the non-oil sector projected to grow just 0.2%. In itself, this is not much of a problem. But the Nigerian oil & gas industry is in a poor state. The recent shocks to oil price and oil production have merely exposed an industry that suffocated itself by refusing to reform, invest, or protect its interests. Since taking up the mantle in 2015, Nigeria’s Minister of State for Petroleum has attempted to purge the rut in the sector and his proposed reforms are as progressive as they are ambitious.
Nigeria has been here many times. It is fair to say that the development of the oil sector has usually taken a back seat, either because the government is riding the gravy train of high oil prices, or it is attempting to convince voters of its seriousness by talking up other sectors. Hopefully, the ERGP has shattered that false dichotomy. Nigeria needs to focus and develop on its oil sector because this offers the best opportunity for all other industries to grow. In admitting it, we may just muster the political and economic courage to implement the tough reform options available.
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