Of Economic Diversification and Non-oil Revenue

In this piece, James Emejo argues that the Nigerian economy cannot be deemed as truly diversified if the federal government does not derive significant amount of revenue from the non-oil sector

It is heart-warming that the economy has continued to show positive growth following the country’s exit from recession and remains resilient in the face of the threats posed by the COVID-19 pandemic.

It is also interesting to note the consistent improvement in the contribution of the non-oil sector to Gross Domestic Product (GDP) in relation to the oil GDP in recent times.

For decades, the government had been paying lip service to economic diversification without visible traction.

No doubt current administration has recorded remarkable progress in its efforts to reduce over-dependence on oil whose future can no longer be assured amidst the global move traction towards renewable energy sources.

GDP Overview

To put things in proper perspective, the economy grew by 3.40 per cent in 2021, the highest since 2014, when the economy grew by 6.22 per cent.

According to the National Bureau of Statistics (NBS), the expansion in economic activities was largely driven by the non-oil sector as indicated in the National GDP Q4 report.

The report also revealed that the country’s GDP grew by 3.98 per cent (year-on-year) in real terms in the fourth quarter of last year (Q4 2021), lower than the 4.03 per cent recorded in the preceding quarter.

However, the performance indicated a sustained positive growth for five consecutive quarters since the recession witnessed in 2020, when output contracted by 6.10 per cent and 3.62 per cent respectively in the Q2 and Q3 of 2020 under the COVID-19 pandemic.

Notably, the economy was largely driven by the non-oil sector, which accounted for 94.81 per cent of GDP while the oil sector contributed 5.19 per cent to growth.

The Q4 growth indicated a steady economic recovery, accounting for an annual growth of 3.40 per cent in 2021.

The NBS noted that growth rate under the review period was higher than the 0.11 per cent recorded in Q4 2020 by 3.87 percentage points and lower than 4.03 per cent recorded in Q3 by 0.05 percentage points.

In nominal terms, however, aggregate GDP stood at N49.28 trillion in Q4, higher than the N43.56 trillion in Q4 2020, and indicating a year-on-year nominal growth rate of 13.11 per cent.

Nominal GDP in the preceding quarter of Q3 2021 stood at N45.11 trillion while annual nominal value in 2021 was N173.53 trillion as compared to N152.32 trillion in 2020, indicating a growth rate of 13.92 per cent.

In terms of real GDP, which shows the volume of economic activities, the sum of N20.33 trillion was recorded in Q4, higher than N18.54 trillion in the preceding quarter and also by N778.91 billion compared to N19.55 trillion recorded in Q4 2020.

The nominal GDP growth rate in Q4 was higher relative to 10.07 per cent growth recorded in the corresponding quarter of 2020 but lower compared to 15.41 per cent growth recorded in the preceding quarter while 2021 annual nominal growth stood at 13.92 per cent.

The NBS stated, “The improvement being seen in the output growth in the last five quarters depicts a steady progress made in stemming the COVID-19 pandemic and the associated negative impact on livelihood, well-being, and the economy.

“Globally, many countries have witnessed an improvement in economic performances compared to 2020 when COVID-19 was endemic. Thus, economic recovery is a gradual process that requires consistent collective efforts to improve economic activities across the institutional sectors.

“However, in Nigeria, the prospects of consolidating the recovery are glaring considering the improved economic performance over these periods of time.”

Oil contribution

Oil growth rate stood at -8.06 per cent in real terms in Q4 and annual growth rate of -8.30 per cent in 2021. On an annual basis, oil contributed 7.24 per cent compared to 8.16 per cent in 2020.

Non-oil contribution

The non-oil sector, which excludes crude petroleum and natural gas activity recorded growth of 4.73 per cent in real terms, an improvement from 1.69 per cent reported in Q4 2020. The sector recorded an annual growth of 4.44 per cent compared to -1.25 per cent in 2020.

Annual contribution of the non-oil sector increased to 92.76 per cent from 91.84 per cent in 2020.

In addition, the services sector contributed 55.11 per cent to growth while agriculture contributed 26.84 per cent to overall GDP in real terms in Q4, lower than 29.94 per cent in the preceding quarter and 26.95 per cent in Q4 2020.

The manufacturing sector contributed 8.46 per cent; lower than the 8.60 per cent lower than 8.96 per cent in Q3 and 8.98 per cent in Q4 2020.

Economy diversification?

The whole essence of economic diversification is to significantly reduce the country’s reliance on fossil fuel for survival.

Given that the oil economy had proven to be increasingly vulnerable to the vagaries of time, especially in view of the volatility exposed by the COVID-19 pandemic, it is only reasonable to diversify the base of the Nigerian economy to guard against external shocks.

But though the government argues that the economy is now fully diversified, given the contribution of the non -oil component, the oil economy still accounted for over 80 per cent of federally generated revenues.

This implies that whenever there’s volatility in oil price, the Nigerian economy sneezes still – and such an economy cannot be adjudged as fully diversified if oil still dictates the pace and could hold the economy to ransom.

Analysts’ concerns

Commenting on the development, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, described the situation as a mismatch – where the oil sector contributed 80 per cent of federally generated revenue but accounted for only 5.19 per cent of GDP.

He told THISDAY, “This could mean that government is not generating enough revenue from the non oil sector. In other words, the non oil sector is driven by the private sector, and government is not optimising the growth in the private sector to generate enough revenue for itself”.

He said, “It also means that private sector involvement in oil sector is minimal compared to government.

“However, the 2022 budget has been predicated on a reversal of this mismatch, as government proposed that only 35 per cent revenue will be expected from oil sector, while 65 per cent would be expected from non oil sector.”

Ekechukwu added that the amendments in the Finance Act are expected to support and drive the revenue from the non oil sector through inclusion of taxes that were hitherto, not within the tax net, particularly taxes in gaming and foreign e-channel companies, as well as other amendments therefrom.

Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade said the country’s over dependence on oil revenues had affected other key major growth areas which government had not really developed to take over from crude oil.

He said, “The revenue from crude oil accounted for 80 per cent of federally generated revenue because it still the highest grossing revenue earner for the country as regards foreign exchange despite his lower contribution to the GDP.

“Nigeria needs to ensure that the key drivers of the economy that contributed 94.81 per cent to the GDP like agriculture, transport and logistics and the aviation sectors are strengthened to ensure better performance in Q1 2022.”

He pointed out that consistent and targeted reforms were needed to achieve sustainable growth in the non-oil sector adding that mining and solid minerals, health and education needed to be given priority.

Gbolade said, “There is nothing stopping Nigeria from being the health and education hub were health and education tourism can be encouraged to earn the much needed foreign exchange.

“We also need to implement revenue based fiscal consolidation.

“Finally, we also need to reduce inflation and unemployment and work towards ensuring policy framework that can boost investment in key sectors of the economy to sustain the GDP growth.”

On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said it would take time to dilute the dominance of oil as the major revenue driver given its demand in global markets and Nigeria’s seemingly abundant supply.

He explained that the dominance also creates a concentration risk to government coffers, stressing that “If oil prices rise, the economy looks buoyant and if prices drop significantly then the reverse is the case”.

He said, ” The non-oil sector will begin to compete with oil as a revenue driver when we as a country are able to harness the vast resources we have and begin significantly exporting to global markets.

“This can only be achieved through long term strategic thinking backed by policy directives.

“There must also be incentives for all regions of the country to produce rather than an over-reliance on an over burdened federal government.”

Shelleng, however, pointed out that “Historically, the non-oil sector has been the major driver of GDP in Nigeria, whilst government revenues have largely been dominated by inflows from oil sales.

“There has been a concerted effort by the government in recent times to diversify away from an over-reliance on oil as a driver of revenues.
Recent significant increases in non-oil revenues have included customs duties and taxes as the collections from the relevant agencies have become more efficient,” he said.