Reacting to the recent slide in the price of oil, some members of the Organised Private Sector (OPS) and economic experts have renewed the call for the diversification of the economy to wean if from its heavy dependence on oil. Assist. Editor Chikodi Okereocha writes that this could be the impetus to revamp the real sector, particularly agriculture, which was once the economy’s mainstay.
Nothing would gladden the heart of the Registrar/Chief Executive Officer (CEO), Institute of Business Development (IBD), Mr. Paul Ikele, than to see Nigeria’s budget prepared without mentioning the price of oil. “Our budget should not be dependent on oil, but on the tax system. How much tax revenues can government derive?. Secondly, government should encourage Nigerian industries. It should look into agro-allied businesses,” he said, emphasising that the only time Nigeria can be said to have actually moved away from oil is when the budget is prepared without predicating it on proceeds from oil. He regretted that “for now, everything depends on oil.”
Ikele told The Nation that for the economy to be on the right track, there was urgent need to reverse the current trend where the nation’s annual budget is predicated on proceeds from oil in neglect of the real sector particularly, agro-allied businesses and the agricultural sector.
He recalled, for instance, that in its glorious days, agriculture contributed about 40 per cent to the country’s foreign exchange earnings through exports; creating millions of job opportunities in the process. “Nigeria had palm kernel, cocoa, and groundnut pyramids,” he said, asking, “why did they disappear? Is not because of global changes when they discovered that oil can give more than what you get from those agro-allied businesses?”
The price of Nigeria’s oil has been dropping in the international market in recent times. Oil price is said to have slumped from $114 per barrel in June to $85 per barrel currently, the lowest in three years. This has sent shock waves to experts and operators in various sectors and Nigerians in general, prompting renewed call for diversification of the economy.
This is so considering the fact that for an economy that is 95 per cent dependent on oil for its foreign exchange earnings and 85 per cent dependent on it for revenue, any drop in oil price poses major risks to some key macroeconomic variables and the general economic conditions.
For instance, the Lagos Chamber of Commerce and Industry (LCCI), in its this year’s 3rd quarter press briefing in Lagos, raised an alarm over the current scenario of sliding oil price. The LCCI, through its President, Alhaji Remi Bello, listed the main impacts of the sliding oil price to include the government fiscal operations, naira exchange rate, capital flow reversals, stock market, foreign reserves, inflation and interest rate among others. The President noted, for instance, that declining oil price means reduction in revenue inflows, which, according to him, has implications for the capacity of government at all levels to meet their statutory obligations.
Alhaji Bello pointed out that most states are over 80 per cent dependent on statutory allocations, which make the impact of declining oil price very profound. ”Already, some states are having difficulty with the payment of salaries of their workers. Many have issues with payment to contractors,” he said, insisting that major adjustments in government spending at all levels are clearly inevitable.
He also pointed out that exchange rate is a price determined by forces of supply and demand, with the strongest factor on the supply side being the forex inflow from crude oil. ”Therefore, a downward trend in oil price would naturally exert significant pressure on the naira exchange rate depreciation. Although the CBN has been struggling to defend the naira, this may not be sustainable if the slide in oil prices persists,” he said
The LCCI President also expressed worries that with Nigerian economy estimated to be over 80 per cent dependent on imports, exchange rate depreciation would mean new pressures on production and operating costs in the economy, which would generate new inflationary pressures. He added that high importation costs will also come with high import duty payment, port charges, Value Added Tax (VAT) as all of these are computed as percentages of import value. Besides, trend of oil prices, he stated, is a major driver of foreign capital flows, especially portfolio flows. He said for portfolio investors, oil price and exchange rate conditions are major indicators that drive their investment decisions.
Alhaji Bello is not done. He said there is a relationship between stock market performance and the fortunes of the oil market. “Nigerian Stock market is well known to be more vibrant when oil prices are high. A major factor in this is the attraction of foreign portfolio investors, who currently account for about 60 per cent of the market. Their sensitivity to oil price and exchange rate movements is very high. Furthermore, declining oil price scenario often result in further tightening of monetary policy to preserve macroeconomic stability. The result is high interest rates and superior returns on investments in the money market, which could have negative impact on the stock market,” Bello said.
The LCCI is also worried that the situation would impact external reserves. Bello noted, for instance, that declining oil price would reduce the accretion to reserves thereby putting the reserves under pressure. He said the customary disposition of the Central Bank of Nigeria (CBN) to defend the naira through increased supply of foreign exchange will take its toll on the robustness of the external reserves, more so when the excess crude account has been considerably depleted.
While saying that the likely CBN response to the current scenario is to intensify the tightening of monetary policy, he said this will further push up Monetary Policy Rate (MPR) currently at 12.5 per cent, increase cost of funds to investors in the economy and constrain the the banks from having access to investible funds. ”All these would impact negatively on the bottom line of enterprises in the economy,” he lamented.
Bello explained that the essence of the foregoing review of the implications of declining oil price is to alert stakeholders in the economy of the challenges that lie ahead. According to him, adjustments will become inevitable at the public and private sector levels, while business models may have to be reviewed to ensure sustainability. There will also be fiscal adjustments in the public sector to ensure governance sustainability as well. ”It cannot be business as usual,” he said.
Indeed, the LCCI’s review exposes the economy’s structural defect on account of its over dependence on the oil and gas sector for revenue, which creates serious vulnerability. And this is why experts have renewed their call on the Economic Management Team to intensify the diversification agenda through effective implementation of policies. One of the viable areas the government could latch on, according to Ikele, is agriculture. Ikele and other experts insist that government must put in place deliberate plans that target the development and transformation of the agricultural sector, which is a major income earner.
Interestingly, unlike oil deposits that are exhaustive, the agricultural sector is non-exhaustive, with capacity to generate millions of direct and indirect employment opportunities. With large expanse of arable land and good weather conditions, the agric sector would place Nigeria in the league of food sufficient nations if well harnessed and packaged.
