Our Reporter
AT a time the world’s economy is imperilled on account of the cut in crude oil price caused by the spread of coronavirus, Olabode Agusto, Director, Agusto & Co. Limited has impressed on the federal government, the need to diversify the nation’s economy away from oil.
The diversification of the economy becomes inevitable in view of the credit crunch the country contends with during oil crisis at the global market.
According to Agusto who was guest speaker at the 17th annual Aret Adams memorial lecture in Lagos, organised by the Aret Adams Foundation recently, where he presented a paper entitled: ‘Nigeria’s Economy after Oil: How should we prepare?’ while noting that crude oil has provided Nigeria with a sizeable amount of USD revenues which the country has used to trade with the rest of the world, however lamented that in periods of high crude oil prices, Nigeria uses her forex earnings to support the exchange rate but in periods of weak prices she allows sharp currency depreciations.
Agusto, the former Director General, Budget Office said, “Severe devaluation of the NGN is usually accompanied by a banking crisis. This is because weak crude oil price drives the economy into recession, devaluation increases the financing needs of businesses and those who owe hard currencies suffer large exchange losses. All these weaken the ability of businesses in the real sector to repay their loans resulting in large credit losses that erode banking industry capital.”
It would be recalled that the global crude oil prices fell almost 30 per cent last week, with Brent crude prices falling to $30 a barrel. It all started with the scare brought on by the spread of coronavirus disease (COVID-19), which is expectedly having a major adverse impact on the global economy. COVID-19 has till date infected over 121,312 people in 120 nations and territories as on March 11, with over 4,379 deaths reported worldwide.
On the external side, crude oil has provided Nigeria with a sizeable amount of USD revenues which we have used to trade with the rest of the world. According to the CBN, during the past 20 years, total USD inflows into Nigeria on the trade side was US$1.5 trillion; US$1.1 trillion or 79% came from selling crude oil and natural gas to the rest of the world and US$0.3 trillion came from remittances from Nigerians working abroad.
Businesses in Nigeria have used these USDs to equip their factories, buy raw materials and some have imported finished goods for resale. Households have used these USDs to buy cars, houses in the UK and the USA, educate their children abroad, buy healthcare from UK and the USA and fly foreign airlines to and from key capital cities in the world. In short, crude oil has helped Nigerians finance a lifestyle that is significantly above our productive capacity.
Even with crude oil, our 200 million people produce goods and services worth only US$0.4 trillion annually, the 320 million people in the US produce US$20.5 trillion annually.
On the fiscal side, crude oil has provided the government with a large amount of oil revenue in the form of oil taxes (PPT, royalties and rents paid by oil companies on their share of the crude oil produced) and proceeds of the sale of the government’s equity crude. During the past 20 years, the federation account received NGN 87 trillion in oil revenues and NGN 29 trillion in non-oil taxes making a total revenue of NGN 116 trillion. This money was shared NGN 53 trillion to the FGN, NGN 40 trillion to state governments and NGN 23 trillion to Local Government Areas.
In periods of high crude oil prices, Nigeria uses her USD earnings to support the exchange rate but in periods of weak prices she allows sharp currency depreciations. Therefore, exchange rates move in steps instead of a gradual depreciation of close to 10% per annum.
Government, he stressed, ‘’should then use these three sectors – external trade and investment, tax revenues and the financial sector to help businesses and households to thrive. What happens in Nigeria is that we experience economic booms in periods of high oil prices and recession when prices fall.’’
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