Oil revenue has been and still is the mainstay of the national economy and is likely to remain so for a long time to come, as it currently provides the bulk of government revenue and most of the foreign exchange earnings.
At present, crude oil exports account for about 90 percent of foreign exchange earnings and 80 percent of government revenue; thus making the country’s economy heavily reliant on the petroleum sector. This dominant role, coupled with inadequate management of oil revenue during periods of windfall, has pushed other productive sectors like agriculture, the traditional mainstay of the economy, from the early 50s and 60s, to the background; thus exposing the country to volatility in the crude oil market.
For a mono-product economy like Nigeria, it is not unprecedented, that fluctuations in the price of crude oilor a decline in oil production will impact the country’s revenue negatively.
Nigeria relies heavily on crude oil revenue to fund government spending. Oil accounts for about 15% of Nigeria’s GDP but it makes up about 80% of government revenue. Thus, a decline inoil price has adverse impact on government revenue;thereby increasing the requirement for borrowing and debt servicing and attendant impact on the funds available for capital expenditure.
It is disheartening to note that despite the positive windfall gains arising from the benchmark oil price of $79, $77.5 and $65 in 2013, 2014 and 2015 respectively, the country’s external reserves declined precipitously from $53.6 Billion in 2008 to $30.9 billion as at March 2015. With recent higher crude oil prices, external reserves have bounced back, and were at about $46 billion in August. This flunctuating trend in external reserves reflects the current concern of the CBN to continuously defend the Naira in the face of flux in foreign reserves.
A consequence of this fluctuation is the unsustainability of some of the CBN measures. Some of these measures, for example, tightening fiscal and monetary policies, have adverse consequences for other sectors of the economy.
Nigerian’s economy continues to post a gloomy outlook, as the fluctuations in oil prices and government revenue continue to reverberate through the fiscal and monetary policy framework. The attendant consequences of the unfavorable exchange rates for the naira, increase in monetary policy rate, increasing cash to reserve ratio are amongst the challenges that could undermine business activities; especially with Nigeria’s heavy reliance on imports for both consumer and investment goods.
A reduction in inefficiencies within Nigeria’s prized oil industry will play a pivotal role in helping Nigeria realize its potentials. Despite producing an average of 2.38 million barrels per day in 2011 and holding the title of Africa’s largest crude oil exporter, Nigeria is nowhere near its productive potential. More recently, crude oil production has been declining. Production stood at roughly 1.5 million barrels per day as at June. Ironically, Nigeria has to import refined fuel, due to its unproductive and inefficient oil refineries that operate sometimes at below 20% of name- plate capacity. Studies have shown that Nigeria could produce approximately four million barrels per day within 10 years. To do so however, requires a more efficient use of resources and thoughtful economic management.
Apart from the impact of fluctuating oil prices and declining oil production, the emergence of shale oil and gas and electric cars represent a clear and present ‘lion threat’ to the revenues of OPEC (Organization of Petroleum Exporting Countries) member states which includes Nigeria, and an alert for economic diversification for all Members through the auspices of their petroleum revenues.
The four critical areas for diversification should be in infrastructure development, downstream petroleum sector, power sector, and in research & development.
Regrettably, Nigeria’s foreign direct investment (FDI) inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industries. Such a mono-sectoral concentration in FDI limits technology transfer and inhibits job creation.
However, through a conscious effort geared towards diversification of the economy, Nigeria can also diversify the distribution of the FDI it receives. Nigeria should attract FDI in other sectors, including manufacturing, agriculture, tourism, consumer products, and construction, as these sectors could generate additional jobs and create a more balanced economic growth.
There is no doubt that Nigeria is blessed with abundant energy resources, but the challenge has always been in regard to how to utilize the revenues to diversify the economic base, particularly the power sector.
Consequently, the country is plagued with the inability to generate adequate power supply for the teeming populace and the business sector. The consequence of generating only 3500MW of power is the incessant power outage (black-outs & brown-outs), which continues to threaten small and medium- scale enterprises, as well as increasing the cost of doing business in Nigeria. It is imperative for the government to diversify the energy mix, so as to guarantee security of energy supply.
The following quote from President Obama captures the ubiquitous importance of developing a robust power sector.
“….. And we believe that nations must have the power (electricity) to connect their people to the 21st Century. Access to electricity is fundamental to opportunity in this age…. It is the lifeline for families to meet their basic needs. And it is the connection that is needed to plug Africa into the grid of the global economy”.
In the quest for plausible strategies that will prevent the government and the economy from plunging into backwardness and recession, at least in the short to medium term, the government should make conscious effort to:
(a)Secure significant new market share for crude oil exports in China and India.USA is now a net exporter of crude. This will represent a continuous source of revenue for the Nigerian treasury, until the switch to electric cars comes fully into the equation; (b) Diversify the petro-dollar economy into other sectors (power, agriculture, mining, and manufacturing sectors, etc) without further delay; (c) Increase in-country crude refining capacity for domestic self-sufficiency and export of petroleum products; (d) Plug crude oil theft and illegal bunkering activities; (e) Plug all loopholes in government revenue looting; (f) Plug all loopholes in tax revenue remittance, and (g) Save adequately for future generations by linking every barrel to socio-economic development through sound policies and hard-wired legislation.
For drastic economic development in the face of fluctuating oil revenue, we must face the fact that, there are no easy options; there are only hard choices to be made.
- Prof Nwaozuzu is Deputy-Director at Emerald Energy Institute (for Energy & Petroleum Economics, Policy, & Strategic Studies), University of Port Harcourt.