Lukman Otunuga
The sharp declines in crude oil prices have dealt a crippling blow to Nigeria which is dependent on crude oil exports for a handsome chunk of its government revenues.
For the most part of 2015, the diminishing government expenditure has enforced major headwinds for the Nigerian economy, while incessant declines in oil revenues continue to weaken the Naira without fail. A weak Naira complimented with mounting fears over a potential economic slowdown has placed the Central Bank of Nigeria under pressure to induce stimulus measures in an attempt to revive economic growth.
There have been ongoing talks about a Naira devaluation which bred further uncertainty, consequently encouraging bearish investors to attack the heavily vulnerable Naira. Nigeria’s best course of action to revive economic growth may be to leverage its non-oil sectors, such as agriculture and infrastructure, which would eliminate some dependence on crude oil – a market that shows tepid signs of recovery.
A booming population, fertile soils and extensive rainfall are the perfect ingredients to introduce agricultural policies aimed at boosting domestic production. Such policies should create a solid platform for Nigeria to diversify from its reliance on oil exports, while also offering an opportunity to revive falling GDP growth. Expenditure on internal agricultural development in Nigeria has been strikingly low and according to the World Bank, the nation’s agricultural investments as a share of overall spending averaged just 3.8%, compared to the West African average of 7.4% in the period from 2000 to 2010.
However, there could be huge scope for the agriculture sector to provide substantial government revenues, while also stabilizing the nation’s economy if overall spending is increased and the correct policies are implemented swiftly. For example, with Nigeria’s unemployment rate at 10.4% in January 2016, the 5000 Naira monthly unemployment benefits if implemented could in part be transferred to investment in the agricultural sector, which may then provide new employment opportunities which would not only boost agriculture but also rekindle economic growth.
By taking further steps to promote domestically manufactured products, while importing less, should reduce the nation’s heavy dependence on the oil sector and would also improve internal competitiveness. With almost $10 billion a year spent on imported agricultural products which amount to 20% of Nigeria’s total imports, a fair chunk could be trimmed if the infrastructure for domestic agriculture is better supported. Local farmers and herdsmen could be paid the surplus from the savings made from importing less, which in turn may offer them an opportunity to farm wheat, fruit and other agricultural products that could not only be consumed domestically but also exported. With herdsmen cultivating the lands of Nigeria for grass to feed their cattle, there is scope to automate this task through improved machinery and technology to ensure that grass can growth through the year.
In addition, there are significant shortfalls in many areas of Nigeria’s infant infrastructure sector such as housing, manufacturing, and roads which may provide a source of economic growth, as well as generating an overall economic multiplier effect if leveraged correctly. Better roads and transport infrastructure would also reduce the challenges faced when exporting agricultural products, as well as providing opportunities for the manufacturing and tourism industries. In terms of manufacturing, by taking local produce and processing it into finished products for the local and export markets, not only adds value but will also bring in valuable foreign exchange.
A final, and arguably more radical, method focused on the Naira itself could be to remove the 198 peg against the Dollar so that the currency finds its own equilibrium price level derived from supply and demand. While it is understandable that a Naira devaluation may trigger inflationary pressures, the current peg is eroding Nigeria’s foreign reserves and enforcing further downside pressures to an economy already bruised by falling oil prices. What makes matters worse is the parallel ‘black’ market that trades around 320 to the Dollar which is 50% more than the current peg, possibly breeding corruption as the middle men exploit the arbitrage opportunities. Although an active devaluation may be out the picture, for now, a free floating Naira could boost demand for local goods resulting in the first steps to reviving economic growth away from non-oil products.
The outlook for Nigeria continues to look quite dim amid ongoing declines in oil prices, but if the necessary steps are taken to reduce the dependence on oil exports, it may be just the stepping stone which is needed for the nation to re-emerge potentially greater. Agriculture and infrastructure could be the engine for future growth if the government takes the correct steps to increase productivity and boost investment. Although GDP growth and the Naira has been predicted to weaken further in 2016, this short-term pain may offer long-term pleasure when Nigeria re-enters the global arena as a nation that has broken away from the shackles of falling oil prices to one that is self-reliant.
– Otunuga, Research Analyst at FXTM
