The Covid-19 pandemic has given rise to challenges and opportunities. It has inflicted incalculable damage on the world economy, including Nigeria’s. But, it has also brought to the fore the vulnerability of Nigeria’s oil-dependent economy to global shocks, thus throwing up an opportunity for relevant authorities working with operators in various sectors to rev up the ongoing diversification drive. Assistant Editor CHIKODI OKEREOCHA reports.
Despite the unprecedented disruption in business, economic and financial activities by the Covid-19 pandemic, one reassuring thing is, perhaps, that all the stakeholders in the economy are on the same page on the urgent need to take advantage of the crisis to diversify the economy.
Stakeholders, including economic managers, operators in various sectors and Nigerians agree that the ravaging coronavirus has, inadvertently, opened a fresh window of opportunity for Nigeria to once again vigorously pursue economic diversification.
The Covid-19 outbreak has dealt a severe blow to the global economy, including Nigeria’s, with experts and industry operators warning that if the pandemic is not brought under control, at least in the near term, the economy might slip into another recession. But to those pushing the diversification option, it is the tonic to ward off an impending recession.
It is also the assured route to wean the economy from its over-dependence on oil and gas and shield it from vulnerability to global shocks. That the oil price has, in recent times, been trading below the budget benchmark of $57 per barrel in the international market has re-enforced the position that diversification is the way to go.
For instance, Benchmark crude oil rose 48 cents to close at $24.49 per barrel on Wednesday, last week. Brent crude, the international standard, rose 24 cents to $27.39 per barrel. With oil price falling below $30 per barrel, last week, the sharp drop in revenue could cause significant dislocations in the 2020 budget.
The dislocations are already manifesting. For instance, the Federal Government, on Wednesday, last week proposed a slash of the oil benchmark from $57 to $30 per barrel in the 2020 budget, with Minister of Finance Zainab Ahmed citing unstable price of oil in the wake of the coronavirus pandemic as reason.
The dramatic dip in oil price is not entirely caused by the pandemic though. Oil prices have been hit hard due to a drastic cut in global oil consumption, compounded by the ongoing price war between Saudi Arabia and Russia.
The price war said to have been triggered by Saudi Arabia, the largest crude oil exporter, according to the Director-General of Lagos Chamber Of Commerce and Industry (LCCI), Dr. Muda Yusuf, portends ominous signs for the economy. This, he said, is on the back of the collapse of the OPEC-Russia alliance, with Saudi Arabia offering significant discounts to its customers and also increasing output.
Yusuf said the revenue effect of the coronavirus, which is related to the drop in oil price, is unsettling, because oil revenue accounts for between 50 per cent and 85 per cent of government’s revenue and foreign exchange earnings. This means that a drastic reduction in government’s revenue is inevitable in the near time.
“This has implications for the level of fiscal deficit in the budget, budget implementation will be constrained, infrastructure financing will be affected, borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies (Nigeria inclusive) looks rather gloomy,” he said.
The effects of the crisis on foreign reserves are no less unsavoury. Oil revenue is the major driver of accretion to the foreign reserves. Yusuf said the slump in oil price and the adverse expectations would put fresh pressures on the reserves, which is at all-time low of $36.2 billion as at March 3.
He listed some of the obvious implications of the low accretion to this fiscal buffer to include weakening of investors’ confidence, generation of speculative pressures on the currency, likely depreciation of the naira exchange rate, heightened inflationary pressures on the back of currency weakening.
For a country already grappling with challenges of weak revenue performance and an erosion of her fiscal buffers, other possible implications of the situation include likely increase in production and operating costs for businesses, weakening of purchasing power with adverse implications for the welfare of the citizens.
How Nigeria shot itself in the foot
The preponderance of opinion is that the revenue effect of the Covid-19 pandemic, which is related to the drop in oil price, would not be this devastating if successive administrations had pursued diversification with vigour.
The belief is that there is nothing abnormal in the rise and fall of oil prices; prices are expected to move up and come down in any normal market. In other words, Nigeria lacks control over oil price, which is internationally determined by market forces.
However, experts and stakeholders argue that the colossal management failure of the economic mangers and gross negligence of the ruling class prevented the country from anticipating issues that will drive oil prices up or down.
Now, the chickens have come home to roost. The consensus is that Nigeria shot herself in the foot by not taking advantage of periods of high oil prices in the past by applying the nation’s oil wealth to the provision of infrastructure to support high growth non-oil sectors such as manufacturing and agriculture and diversify the economy.
Indeed, since the discovery of oil in commercial quantity in 1956, successive governments have failed to invest the oil revenue windfall to close the huge infrastructure gap and also diversify the economy.
If the nation’s earnings from oil had been invested in critical infrastructure such as steady and reliable electricity supply, the economy and Nigerians would have been reaping the benefits now that oil prices have tumbled in the wake of the coronavirus outbreak.
The case for diversification
According to experts at PricewaterhouseCoopers (PwC Nigeria), oil & gas jobs account for less than one per cent of total employment and the young population can no longer be absorbed by the sector.
The experts said apart from the need to insulate the economy from the risk of being vulnerable to a single commodity, job creation was another core reason Nigeria needed to pursue diversification.
The consulting firm identified the real sector as one of the priority sectors that Nigeria should target for diversification, apparently because of its job creation potential and dominant transmission link to the economy.
However, a combination of inadequate infrastructure, particularly electricity supply, and the nation’s challenging fiscal and monetary policy environment have continued to weaken the real sector’s capacity to stimulate diversification and create jobs.
Read Also: Ekiti confirms second coronavirus case
Had the Federal Government summoned the political will and vigorously pursued economic diversification after the economy’s exit from the last recession, the real sector would have been sufficiently galvanised to help mitigated the impacts of the current slump in oil prices.
Recall that diversification became the government’s buzzword after the economy was first hit by a debilitating recession, following a sharp slump in oil prices at the international market, which started mid-June 2014.
From over $120 per barrel in December 2013, oil price fell to around $60 per barrel in December 2014. It later crashed to as low as $28 per barrel, the lowest in 12 years.
This set off a major crisis in Nigeria’s finances, which later forced the country into a recession. The economy managed to exit recession in 2017, but it has yet to recover fully. Her over-dependence on oil revenue has not continued to weaken the economy but, made it vulnerable to global shocks.
However,despite the emphasis on leveraging the non-oil export sector particularly the real sector to diversify the economy, earn foreign exchange and create jobs, the implementation of the diversification agenda has continued to lack steam. Relevant government agencies have failed to improve the quality of export products. The decrepit infrastructure has not been fixed.
The sunny side of Covid-19
Despite the outcry over the impacts of the Covid-19 outbreak on the local economy, experts and key stakeholders believe that the crisis has again underscored the need to prioritise diversification. “The crisis has given rise to both challenges and opportunities …,” says Partner at KPMG, Mr. Ajibola Olomola.
The import of Olomola’s assertion is not lost on the authorities, which appears poised to grab the opportunity thrown up by the crisis to renew the push for economic diversification. For instance, the Central Bank of Nigeria (CBN) said it was considering adding sanitisers to the list of products on foreign exchange restriction.
Making this known at a consultative roundtable meeting organised by the CBN in Abuja, a fortnight ago, with the theme “Going for Growth 2.0,” the CBN Governor, Mr. Godwin Emefiele, said Nigeria must take advantage of the crisis created by coronavirus to diversify its economy.
He wondered why Nigerians do not patronise made-in-Nigeria sanitisers, and urged owners of patent outlets and pharmacies to buy such products being produced in the country.
“Giving the impact of coronavirus, I heard some countries are trying to ban export of some pharmaceutical products. We must look inward at this time. CBN is also working to support the pharmacy and pharmacology industry,” Emefiele said.
He stated that the country’s reliance on proceeds from crude oil since the 1970s had become a problem hence something must be done to change the trend.
Africa’s richest man President, Dangote Group, Alhaji Aliko Dangote, could not agree less. He said: “The crash in oil price has become very important for us to have a solution and the solution is by diversification of the economy.
“There are two ways to diversify the economy, which can be driven through agriculture and manufacturing. However, to achieve inclusive growth, there must either be backward integration or import substitution.”
Dangote described as disturbing the fact that Nigeria cannot produce what it consumes. “Only in 2019, our exports were about $42 billion, which is not sustainable and we cannot continue like this. To have a population of 200 million and grow at 2.7 per cent cannot be sustained,” he said.
The billionaire businessman, who spoke at the CBN consultative roundtable meeting, echoed the collection position of Nigerians and operators in various sectors when he said: “We have been singing about diversification, but we haven’t done anything yet. We need to make our country a producing country and act now.”
According to Dangote, one area government needs to look at is the cost of doing business, which is too high. “Government must look at improving power supply and infrastructure because these are the areas that will boost the Small and Medium Enterprises (SME).
“It is impossible to diversify without taking consideration of certain things, including interest rate, long-term funds and the support by the CBN to create enabling the environment,” he added.
Will the government muster the political will to address the afore-mentioned issues, which, according to Dangote and, indeed, other industry operators, are key to the successful implementation of the ongoing diversification programme?
While answer to this remains a conjecture, what is however, clear is that diversification is the only way to go not only to avert another recession staring the economy and Nigerians, in the fact, but also insulate the economy from distortions that may arise in the future when oil prices slump at the international market.
Leave a Reply