The effects of the fall in crude prices on Nigeria’s economy continue to draw reactions. However, there is light at the end of the tunnel, as what the nation needs to do is to look inwards to turn the tide, reports Group Business Editor, SIMEON EBULU
The effects of the oil price drop on the nation’s economy should neither be seen as unique to Nigeria, nor treated in isolation of the trend in global economies.
Incidences of economic downturn and rebounds, as the case may be, are universal occurrences that impact on nations and economic blocks.
In 2012, the United States (US) and the European Union (EU) witnessed harsh economic times, which resulted in job losses and triggered severe global unemployment crisis. It was not only a major issue in the US presidential election in 2012 but also a source of frustration in many EU countries.
It was particularly severe in Greece, Spain,Italy and in the EU block. As a matter of fact, the streets of many European cities became protest grounds.
Interestingly, the affected nations are very advanced economies that one would ordinarily assume, or rationalised, to be immuned to such untoward economic developments, as against the economies of developing and emerging markets.
How wrong.
It is against this background that the challenge thrust on Nigeria, following the continuous drop in the price of its major foreign exchange earner – crude oil, should arouse interest on both the public and private sectors.
The drop in oil prices, the Minister of Finance and the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, admitted, is a serious challenge which, according to her, calls for serious concern and which we must confront as a country.
“We must be prepared to make sacrifices where necessary,” the minister noted.
She said the country needs to brace for tougher times ahead by reviewing its expenditures and building economic buffers through budgets that would be based on modest oil prices. She pointed out that sound macroeconomic management is crucial to Nigeria at this time. She emphasised the need to plug all avenues of revenue leakages.
Already, the continuous slide in the international price of crude oil is taking its toll on the econony. The government has reacted by announcing a set of austerity measures. These include: a ban on non-essential overseas travels, and readjusting the oil price benchmark for next year’s budget. It is now hovering around $65, after it was originally fixed at $73 from its 2014 high of $77.
Dr. Okonjo-Iweala, who outlined the government’s response at the Africa Financial Summit, organised by the Institute of International Finance in Lagos, stated that the focus centre on how to drive the non-oil revenue base to be able to weather the storm. The minister pointed out the urgent need for Nigeria and, by extension, other African countries to explore other means of shoring up their revenues in the face of the falling prices of export commodities.
She said: “I strongly urge other African countries to look into other directions. We need to build our economic buffers. Of course, there will be pressure to borrow in the face of falling commodity prices, but we cannot afford to borrow. There is a need to drive domestic resource mobilisation.”
On the heels of the Minister’s presentation, the Governor of the Central Bank of Nigeria, (CBN), Godwin Emefiele, also made a case for Nigeria to look inward, arguing that import substitution remains the solution to the economic challenges. He explained that for years, Nigeria has wasted too much foreign exchange in importing items that can be produced locally.
According to him, a whopping N1.3 trillion has been spent on the importation of rice, sugar, wheat and fish since 2011, pointing out that this has put too much pressure on the naira and foreign exchange reserves.
He said that part of the measures to redress the situation, will be for importers to replace costly imports with local goods by embracing import substitution.
But market watchers and economists believe that the current situation in the oil market may not be transitory, but permanent and, as such, they are saying that the government should go beyond proposing cosmetic interventions and that the authority should think along the line of engaging long-term, real-time solutions.
Against this background, an economist and finance analyst, Dr. Alaba Olusemore, has joined the fray in calling for the immediate diversification of the economy as a panacea to overcoming, or at least mitigating the economic downturn.
Beyond the number of austerity measures announced by the Federal Government, he spoke of the rgent need to begin to diversify the economy.
“Let’s go beyond sweet talk and truly begin to base our expenditure pattern and tastes on income from non-oil revenue,” he told The Nation in an interview.
Dr. Olusemore, who is the Managing Consultant, Nesbet Consulting, a Lagos-based Management and Finance Consultancy firm, recalled that although the nation has been on the journey to diversify the economy since the 70s, every succeeding government has always paid lip services to the development of the non-oil sector.
“We need sustainable income-base for this nation. Whether we like it or not, we must do it one day,” pointing out that the earlier we begin to act, “the better for the in-coming generation.”
Besides diversification, there is the need to immediately fix the refineries, or give the people the opportunity to establish same. “Why should Nigerians go to other countries to establish refineries,” he queried, urging that tax incentives be given to those who choose to refine crude locally.
“The more we export crude and import refined petroleum, the more there will always be gaps that need to be financed through subsidy,” he argued, saying there is no substitute for accountability and transparency in government finances to mitigate likely socio-economic and political consequences of the slide in the price of crude oil.
More attention on non-oil sector
The Director-General of the Lagos Chamber of Commerce and Industry (LBIC), Mr. Muda Yusuf, saw the sliding oil price as significant and scary. According to him, it is at its lowest in four years.
He said that for an economy that is 95 per cent dependent on oil for its foreign exchange earnings; and 85 per cent dependent for revenue, this development should be a cause for concern. Yusuf pointed out that overwhelming dependence on oil remains the single most important vulnerability of the economy.
He said: “Crude oil market conditions have profound implications for the Nigerian economy. The current trend with oil price pose major downside risks to some key macro-economic variables and the general economic conditions. The main impacts include: government fiscal operations, naira exchange rate, capital flow reversals, stock market, foreign reserves, inflation and interest rate, among others.”
He added that the declining oil price means reduction in revenue inflows, a development that has implications for the capacity of government at all levels to meet their statutory obligations.
The LBIC chief said: “Most states are over 80 per cent dependent on statutory allocations which make the impact of the declining oil price very profound. This is even more so when the culture of big and profligate spending has been entrenched. Already, some states are having issues with the payment of salaries of their workers.
Many have issues with the payment to contractors. The major adjustments in government spending (at all levels)are clearly inevitable.
“The good news in all of these is the likely moderation of cost of fuel importation. This is well-known to be a major burden on the finances of the country. The share of the nation’s resources committed to fuel importation and fuel subsidy is horrendous and perhaps scandalous.
It is hoped that declining oil price would moderate this cost.”
However, the major way forward to tackle the scenario, according to Yusuf, is for the government to focus more on the non oil sector.
“The non-oil export sector is likely to profit from current situation, especially where production processes have high local content. Although the capacity of the non-oil export sector is low at the moment. However, there is hope that if the government concentrate on the non-oil sector, there will be a boost to the government revenue and the economy,” Muda said.
In the same vein, the United States (US) Consul-General, Jeffrey Hawkins called on the Federal Government to pay attention to the development of cocoa for exports in view of the dwindling fortunes of crude oil .
Hawkins, while addressing the Cocoa Investment Summit, organised in Lagos by the United States Agency for International Development(USAID), said the clear fall in the price of oil was a clear signal that something needed to be done to diversify the economy.
The envoy urged the government to focus on the promotion of cocoa exports to save the economy from the falling international oil price.
Hawkins noted that the global demand for cocoa is rising faster than production, describing as regrettable that Nigeria has not positioned itself to take advantage of the emerging opportunity.
He told his audience at the summit: “When I travel through the regions of Nigeria, I am struck by the fact that cocoa is still raised by hand, not by machine, and remains a very labour-intensive commodity to produce. Cocoa production is still very much a family enterprise, from planting to carrying the bags of cocoa beans to the buyers, who may be far away from their farms.
“Despite the physical labour involved, farmers are realising very limited incomes from their efforts.”
He warned adding that international buyers are predicting a potential cocoa shortage by the year 2020 with the rising demand. This has already contributed to cocoa prices rising to 25 per cent in the past year.”
Hawkins, who described the development as cheery, said cocoa production has been on the decline in the country.
While cocoa farmers and their trees are aging, the envoy observed that farmers get some of the lowest yields on the continent. With high interest rates and the cost of inputs exceeding farmers’ ability to pay, the sector is not seen as a viable way to make a living.
He stressed that something needs to change if Nigeria will take advantage of rising global demand for quality cocoa. In line with this, he said the government and the private sector should collaborate to enable agribusinesses to thrive over the long term.
Chief of Party for the USAID trade project, Mr. Alf Monaghan, said, big consumption of chocolate throughout Europe and the US has provided an opportunity for farmers to make gains from rising prices, pointing out that the global chocolate confectionery market is currently worth over $80 billion and around 3.5 million tonnes of cocoa is produced each year to meet this demand.
This is the path the nation and industry players should tow to rev-up cocoa production to meet growing demand, and as well mitigate the untoward effect on the nation’s economy of the drop in global oil prices.
