The country must explore other avenues to make the economy viable, argues Felix Oladeji
There has been an increasing call for fuel subsidy reforms globally as policy-makers have expressed concerns regarding the efficacy of such programmes as well as its implications for fiscal sustainability.
Oil plays important roles in the Nigerian economy, contributing about a third of the country’s gross domestic product (GDP) in the 1980s and 1990s. Although its share of the economy has waned in the subsequent decades due to declining oil prices and the changing structure of the economy, the oil and gas sector still accounts for about 11.2 per cent of the GDP in the current decade. Also, the contribution of oil to government revenue has remained quite high, increasing from 70.2 per cent during the 1980s to about 80.0 per cent in the last decade. In terms of trade, oil accounts for about 93.1 per cent of exports and 24.4 per cent of imports during the period 2010-2018.
Against this backdrop, several research have investigated the macroeconomic impacts of oil price shocks on the Nigerian economy. Amongst other effects, it has been shown that oil price shocks generate significant implications for output, prices, exchange rate, government revenues, interest rates and external reserves.
However, there are several challenges facing the Nigerian oil and gas industry. These challenges may be difficult to solve without a change to the 1999 Constitution of the country. According to an overview of the petroleum industry bill (2009), some of the major elements of these challenges include effective, progressive petroleum fiscal systems, the ownership of resources and the exclusive rights of the Nigerian government to allow the exploration and development of petroleum resources in Nigeria, funding options for NOC and joint venture operations, an authentic indigenous participation in the Nigerian oil and gas industry, continual membership of Nigeria in OPEC and the rules of law and institutional empowerment.
An effective and stable fiscal system, basically the Nigerian constitution is the principle that guides the development of underlying petroleum resource and the allocation of revenue generated from the extraction of minerals. Beyond this constitutional foundation, the fiscal terms that govern some of the operational and production or revenue sharing aspects of petroleum fiscal systems in the country are mainly predetermined via the national legislation. However, the non-fiscal instruments are subject to negotiation; this is where some of the political uncertainties and risk can be quantified. Undoubtedly, Nigeria’s petroleum fiscal agreements (PFA) is good enough to improve the country’s economy to a maximum potential. However, it is suggested that the type of contract provided is not as essential as the terms negotiated and the design of the contract.
Authentic Indigenous Participation Issue: several policies have been implemented since the inception of the oil industry. The purpose of these policies is to accomplish an increase of home participation in the oil business. Over the years, oil blocks have been awarded to indigenous firms, but quite a few of these firms are authentic. Also, the implementation of the local content development policy may be argued to be irrelevant. This is due to the unavailability of technical expertise, human skills, and inadequate financial intermediation.
Resource Ownership and Control: the exclusive ownership of oil resources by the federal government in Nigeria may create ‘undue leakages in the economy’. This exclusive ownership has also increased corruption, the inefficiency in petroleum block allocation mechanisms, and limited transparency. The meaningful impact of petroleum taxation policies cannot be felt in petroleum producing regions in a sustainable way due to the existing rule of resource ownership. This is considered to be an underlying factor which perpetuates conflict of interests among stakeholders in the Niger Delta region. This has also resulted in several damages to Nigeria’s economy.
Institutional and Human Capital Development: there are allegations that there are inadequately skilled oil and gas professionals in the international community of the oil and gas industry. This has been the reason for the flooding of foreign petroleum professionals and contractors into the country.
Petroleum policy, the petroleum policy formulation process by the National Assembly is another challenge to the oil industry. There is also inadequate human capacity and infrastructure to independently evaluate the policy acts that govern the oil and gas sector.
Funding options for the National oil company, there is substantial funding requirements for JVA operations from the Nigerian government. The government spent about $3.7 billion on the JVA upstream investments from the year 2002 to 2006. The estimated projected annual funding needs for JV operations ranges between $11 billion and $13 billion from the year 2007 to 201l. This evidence strongly suggests that the national government has received enough revenue above its original investment.
Low oil prices are likely to significantly influence the occurrence of inflation in oil producing countries. If the decline in oil prices is largely driven by supply factors, it is estimated that a 45% decrease in oil prices will increase global GDP by 0.7 to 0.8% in the medium term. Subsequently, there will be a reduction in global inflation in the short term by a full percentage point. However, different factors may change the effects of dwindling oil prices on inflation and growth of the economy. The projected benefits for the global economy may be limited by acute pressure on oil exporters, weak global demand, policy challenges among large importers and lingering post-crisis uncertainties. Furthermore, varying taxes, sharp adjustments in currency, subsidies or other regulations may exhibit various effects on inflation patterns in different countries around the world.
Decrease in oil prices has resulted in significant shifts in real income from exporting countries to importing countries, influence fiscal and current account dynamics, and/or translate into reduced prices for non-oil commodities. Such forces are likely to constrain some dimensions of macroeconomic policies. Contrastingly, it may open opportunities to tackle long-standing reform requirements in other areas.
Furthermore, the decline in oil prices is expected to foster stronger growth, improve fiscal and external balances, reduce inflation, reduce macroeconomic vulnerabilities as well as widen the room for policy. Contrastingly, the growth experienced by oil exporting economies might be negatively affected. This is due to the significant losses in fiscal revenues and export caused by reduced oil prices. A certain level of adjustment may be enforced in oil-exporting countries by sudden reassessment of sovereign risks and credit by investors. This may become more difficult due to limitation in diversification of the sector. The plunge in oil prices has been accompanied by substantial outflow of capital, losses in reserve, and steep depreciations in some oil exporters.
The first quarter’s positive current account number was the result of nothing more sophisticated than exports rising faster than imports over the three months to end-March 2022. At ₦7.10 trillion, the former was up ₦1.33 trillion on the ₦5.77 trillion recorded in the final quarter of last year. Over the same period, imports fell by ₦39.76 billion from ₦5.94 trillion to ₦5.90 trillion. On a year-on-year measure, the respective changes was of an increase in exports of ₦4.12 trillion from ₦2.98 trillion in the first quarter of last year to ₦7.10 trillion in the same period this year. Imports similarly rose by ₦1.03 trillion to ₦5.90 trillion from ₦4.88 trillion in the first three months of last year.
As usual, the export of mineral products made up 90 per cent of total exports in the first quarter of the year. The crude oil component of this rose by ₦3.58 trillion from ₦2.04 trillion in the first quarter of 2021 to ₦5.62 trillion in the same period this year. Given the worry across the economy over the apparent disruption of the link between rising crude oil prices in the global markets and an uptick in the fortunes of the domestic economy, what are we to make of the fact that according to one report, the “Value of the exports of mineral products in Q1 2022 was two-and-a-half times the proceeds from mineral products exports in the corresponding period of 2021”?
The current decrease in oil price is an eye-opener for the Nigerian economy to consider the need for diversification. The country must explore other avenues to make its economy viable rather than depending solely on oil commodity. This will forestall the effect of present or future crude oil crisis on the Nigerian economy. Hence, there is a need for Nigeria to shift to other sectors that were previously neglected when it experienced a boom in oil prices.
Currently there has been an increased cry for diversification in Nigeria; this is due to the negative effects of oil prices on the country’s economy. Diversification is considered to be the nostrum for neutralization of the harsh effects of dwindling oil prices and stabilization of Nigeria’s financial economy. Other countries such as China, India and South Korea have generated massive revenue from non-oil sectors such as manufacturing and information technology infrastructures. Thus, the economy of these countries is blooming in this era of dwindling crude oil prices.
The Nigerian economy has also begun to explore other non-oil sectors. For instance, one of the recent priorities of the financial economy of Nigeria is Small and Medium Scale Enterprises (SME)’s. Small and Medium Scale Enterprises (SME)’s increases output and per capita income, creates job opportunities, play crucial roles in the process of economic growth and industrialization, and improve sectoral and/or regional economic balance via the promotion of resource use and industrial dispersal. Thus, the Central Bank of Nigeria directed Nigerian banks to diversify as well as increase their lending portfolio to non-oil sectors of the economy. This directive was passed to boost production and enhance economic activities in Nigeria.
Finally, economists have made future projections that oil price might not likely increase significantly for the next 10 years. Following this statement, this should serve as a wake-up call to the government that the era of cheap money from oil proceeds has come to end which has been fostering corrupt practices among government officials over the years, so alternatives for government earnings need to be sought for. This research process provides some areas that are worth investing, which means economy diversification is a must so as not to expose the economy to such a negative trend in future. The agricultural sectors that have been neglected over the years need to be revamped, as the country’s population has been projected by United Nations to surpass the United States by 2050.
As earlier mentioned, diversification of the economy is not feasible if there is no guarantee to stable power supply, as this is the sustaining force of any productivity in an economy. The government needs to do more in ensuring availability of stable power; this could be achieved by building more power generating stations, exploring other alternative sources such as wind/solar as this will lead to a boost of private businesses and several startup ideas.
Oladeji writes from Lagos
