More than ever, especially in the wake of disruption in global oil prices and the economic effects of the COVID-19 pandemic, Africa’s largest economy must diversify its economy to stay afloat.
In the past four decades, Nigeria has relied primarily on crude oil as its source of foreign exchange, with over 90% of export earnings coming from crude oil. Prior to the discovery of oil, Nigeria ran a largely agrarian economy, solely dependent on the export of agricultural produce. From 1960 to 1967, the agricultural sector accounted for 64.5% of foreign exports and an average of 57.0% of the country’s GDP, buoyed by groundnut production at the Kano groundnut pyramid and cocoa plantation in the South West.
The oil boom of 1974 created a path to industrialization in Nigeria, leading to increased government expenditure, but also inflation and financial inequality. However, the global economic crash led to an unprecedented demand for diversification, with oil prices severely affected, plunging the country into its first recession in 25 years.
Over the years, economists and political analysts have led the call for diversification, with successive administrations pledging to invest in other sectors of the economy but often without a clear-cut approach. The fall in international oil prices and the economic effects of the COVID-19 pandemic has, however, heightened the clamour.
As the global economy undergoes tectonic structural changes, with a commitment to clean and renewable energy, and a shift toward decarbonization, Nigeria, being a fossil fuel-dependent economy must assess its vulnerability and realign its economic policies to empower its institutions to implement necessary changes to meet up with the rest of the world.
Global Shift Towards Clean And Renewable Energy
The world is edging toward a full-scale transition from fossil fuel to clean and renewable energy. Aside from helping to address contemporary challenges of global warming and climate change, renewable energy offers new dawn, especially for impoverished communities to gain access to electricity through small-scale power supply schemes. This will help to reduce poverty and create transformational changes.
Recently, the 6th Conference of the Parties of the 197 countries that have signed the United Nations Framework Convention on Climate Change agreed to limit global temperature rise to 1.5 degrees Celsius by 2030. Over 100 countries vowed to cut methane emissions, and transition to clean energy. Also, as part of the COP26 declaration on accelerating the transition to 100% zero-emission cars and vans, the national governments, cities, states, and car manufacturers vowed to stop the sale of combustible engine vehicles and begin the sale of only zero-emission cars and vehicles by latest 2035 in leading markets and by 2040 globally.
This is a worrying development for oil-producing countries like Nigeria, especially one that solely depends on it to fund government expenditure. A green economy will automatically create less demand for oil in the international market and subsequently, drive its price down. Nigeria must start looking inward to design and implement policies to transition its economy towards a non-oil-dependent one.
Falling Oil Price
Experts are predicting a decline in oil price, partly attributed to the world’s transition toward renewable energy and aggravated by the COVID-19 pandemic during which demand declined drastically. According to the International Energy Agency (IEA), there is a steady decline in oil and gas upstream investment between 2015 and 2016, with a 25% and 26% decrease respectively. In 2016, crude oil hit an all-time low of 40.76 USD per barrel and has been on a steady decline since, bar an upturn in 2022, which is partly because of disruption in the supply chain and sanctions on trade following Russia’s invasion of Ukraine.
The trend is most likely to continue into the future. According to a Fitch Solution forecast, a barrel of oil will average $100 this year, $90 in 2023, $85 in 2024, and $88 per barrel in both 2025 and 2026. With oil accounting for over 90% of foreign exports and 70% of total government revenue, Nigeria is at risk of recession in the event of a prolonged crash in the global oil market.
A Flexible, But Resilient Economy
According to the World Trade Organisation, “diversification helps to manage volatility and provide a more stable path for equitable growth and development”. As the government invests in economic diversification, more businesses open up and feed off one another, creating a sustainable cycle of economic activities. This means that other sectors absorb the effects of a market crash from any sector of the economy.
The COVID-19 pandemic fully exposed the flaws of over-reliance on crude oil as a source of foreign exchange. A fully diversified economy is critical to building a resilient and insulated country that can withstand the test of time and fluctuations in the global economy.
Successful diversification will bring about structural transformation from low-productivity to high value-adding manufacturing activities and service delivery, hence creating jobs, eradicating poverty, and increasing internally generated revenue.
Among other crucial steps to achieve a diversified economy, the government must commit to the principles of free trade to enhance trade expansion, which will invariably facilitate growth through structural transformation and create more jobs across all sectors. Adopting technology in the industrialization and manufacturing sector is also critical to increasing output and value-added products and services. Government must empower its institutions to gain the public trust, especially stakeholders in the private sector through transparency and accountability in policy-making and implementation.
Considering the rapidly changing global economic landscape, economic diversification must take a forefront seat in government priority in investment plans and policy-making. Developing economies like Nigeria stand at more risk of recession and capitulation if it remains heavily dependent on crude oil. While proceeds from oil do not commensurate with the level of socio-economic development, a diversified economy will supercharge national development through job-value creation, increased per capita income, and a low inflation rate.
Photo by Ant Rozetsky on Unsplash.