By default rather than design, Nigeria is on the brink of a post-oil economy. This is reminiscent of how Nigeria emerged as an oil economy. Then, as now, Nigeria was at the mercy of international events. Oseloka Obaze has remarked, in his piece published in The Chronicle, Internally Generated Revenue: The Unknown Known Finds its Niche, that “we must remember that Nigeria did not shift away from oil. Rather, market forces [are shifting] oil away from the dominant orbit of Nigeria’s revenue”. How did Nigeria emerge as an oil economy? What have been some of the salient features of oil-dominated political economy in Nigeria? And what lessons can Nigeria draw from its years of oil-dominated political economy to chart public policies inspired by a “Beyond Oil strategy”?
Before addressing these issues, it helps to explain when Nigeria emerged as an oil economy. Although oil was discovered in 1956, it was not until 1958 that Nigeria made its first export. Then, the daily production was 6,000 barrels and the value of its oil export that year was One million pounds sterling. At independence in 1960 and all through the First Republic (1960-1966); oil accounted for an insignificant share of both government revenue – less than 1 percent — and an average of 23 percent of export earnings. By contrast, agriculture accounted for over 50 percent of government revenue and 75 percent of export earnings. This was the period when Nigeria accounted for over 60 percent of global supply of palm oil, 35 percent of groundnut, 23 percent of groundnut oil and 25 percent of cocoa. By 1970, oil accounted for 26 percent of government revenue and 58 percent of export earnings.
40 Years of Oil-dominated Political Economy
Nigeria’s great leap into an oil-dominated political economy began in 1974. This was as a consequence of the dramatic rise in oil price in the aftermath of the six-day, October 1973 Middle East war, when an oil embargo was imposed by Arab oil-producing countries on Israel and its Western supporters, leading to the quadrupling of the oil price. Subsequently, a major oil price spike was witnessed in 1979 in the aftermath of the Iranian Revolution. This was followed by steady oil price increase from around 2003, when China’s spectacular economic growth fuelled demand for a range of primary commodities and led to the so-called “commodity super-cycle’’ that lasted nearly 10 years. But there have also been periods of spectacular oil price decline, notably in 1986, 1998 and 2014. Thus, 1974 and 2014 represent the bookend marks of Nigeria’s oil-dominated political economy.
The cycle of boom and bust in oil price over the past four decades of Nigeria’s oil-dominated political economy might encourage some policy makers to think that the current fall in oil price is temporary and will be reversed. But this time is different. Indeed, at the time of this writing, oil price was hovering around $40, after having fallen to $26 in February 2016 – its lowest in 13 years. Oil price may have bottomed out but it is highly unlikely to crest to $100 and above any time soon. There are a host of cyclical and structural forces driving the current oil price decline. The main cyclical forces are the decision of the OPEC countries at their meeting on 27 November 2014 to defend market shares rather than price level; the increased oil supply from Iran in the aftermath of lifting nuclear-related sanctions in early 2016; and reduced demand for oil from China, whose slowing economic growth continues to negatively impact the oil price.
The structural forces would include the adoption of cleaner forms of energy in response to strict environmental and climate change standards which might reduce demand for fossil fuels in the long run; increased oil supply from Brazil’s deep water fields; and increased oil supply from tar sands and shale production in Canada and USA, made possible by the technology of hydraulic fracturing and horizontal drilling. At the same time, three developments in the energy sector in the United States would potentially have adverse repercussions for Nigeria. The US has now increased production of its ‘sweet light” variety of oil – the same as Nigeria’s “Bonny light”, with its Light Louisana Sweet and Megallan East Houston having an American Petroleum Index (API) gravity of 38-40 degrees compared to Bonny Light with API gravity of 35 degrees and Escravos with an API gravity of 33.51 degrees. The US has also lifted the 40 year ban on its oil exports in December 2015, meaning that the US, which stopped lifting from Nigeria in July 2014, has been transformed from a customer to a competitor in the oil market. The US is also poised to emerge as a major gas producer also putting it in competition with Nigeria for gas export markets.
Set against this perspective — that oil price will decline over time as a consequence of these cyclical and structural forces — is the recognition that the world will remain highly reliant for some time on oil products such as petrol, jet fuel, diesel, and other lubricants as the main source of energy for transportation, industrial, and commercial production as well as military hardware. But as I argued in my piece, Nigeria’s Economic Ambitions, published in The Guardian of May 4, 2015, “whether the price of oil rebounds significantly, as the optimists hope, or remains depressed over the long term, as the pessimists expect, it is time to plan for a highly diversified, post-oil economy.”
To chart a path to a diversified post-oil economy, it helps to appreciate some of the main consequences of the 40 years of oil-dominated political economy in Nigeria. One of the most significant impacts of oil-dominated economy was the appearance of the so-called “Dutch Disease” in which the strengthening of the local currency, as a result of huge inflow of foreign currency because of a particular export, makes other sectors of the economy less competitive in international markets. The neglect of agriculture and the failure to diversify Nigeria’s economy can be partly attributed to the ‘’Dutch Disease’’.
There are three other adverse impacts of oil in the political economy. The successive significant changes to the derivation principle which saw the share of revenue allocated to the regions, and later states, fall from 50 percent in the first Republic, when agriculture was the dominant source of export earnings, to 45 percent in the early 1970s to abandoning it completely in 1979 on the eve of handing over to a new civilian regime. It was restored to 3 percent in 1992 and revised upwards to the current 13 percent in the 1999 Federal Constitution. A particularly pernicious consequence of the current derivation formula and the related revenue allocation arrangement among the three tiers of governments in Nigeria is that the sub-national units (the states and local governments) have become more dependent on federal “hand-outs and bail-outs”– leading to a phenomenon referred to as “feeding bottle” rather than fiscal federalism. Meanwhile the cumulative failure to address the severe environmental degradation in the Niger Delta and the dissatisfaction with the current derivation arrangement has generated agitations and conflicts in that region. Pervasive corruption has been one particularly damaging legacy of the oil-dominated political economy, as cheap money from oil resources intensified competition for distribution rather than production.
Lessons for a Post-Oil Economic Strategy
Important and pertinent lessons from the experience of the 40 years of oil-dominated political economy must now inform public policies in the post oil economy. A post-oil economy is not a non-oil economy. Rather, it is an economy that is less dependent on oil as the main source of government revenue, exports and gross domestic product. If the assumptions about oil price in the 2016 federal government budget prove accurate, oil and gas would contribute 8 percent of GDP and 21.2 percent of the federal government revenue (N820 billion out of N3.86trillion), the first time that oil share of government revenue has fallen below 26 percent since 1970. But this represents a forced rather than a planned transition to a post-oil economy.
In charting the post-oil economic strategy, several considerations have to be made. The extent of the dominance of oil in the national economy is such that an immediate successor as source of export earnings, foreign exchange, and government revenue will be difficult to find in the short and medium terms. For example, oil and gas accounted for 97.28 percent of export earnings in the period 2000 to 2013; 77.8 percent of foreign exchange from 2001 to 2010; and 74.4 percent of government revenue from 2000 to 2014, according to Central Bank figures cited by Chima Nwokoji in his article titled Nigerian Economy: In Search of Solution to Currency Crisis and Falling Oil Prices published in Business Tribune of 1st February 2016. To convert these abstract figures into dollars, Malcolm Fabiyi in his article, The Economy is Struggling: Six Steps for Reviving the Nigerian Economy, using 2013 as the year of analysis, has noted that “Nigeria gets all its dollars from four main sources – remittances from overseas-based Nigerians; earnings from oil exports; earnings from non-oil exports; and Foreign Direct Investment. In 2013, the total dollar earnings coming into Nigeria was about $70 billion dollars a year, made up of $21 billion from remittances; $40 billion from net petroleum earnings; $3 billion from non-oil exports and about $6 billion from Foreign Direct Investments”. In 2008, when oil reached the peak price of $148 dollars per barrel in July; Nigeria earned over $60 billion from oil alone.
The Nigeria economy is diversified, judging by the sectoral composition of the rebased economy in 2014, which shows, that services account for 51 percent of GDP; agriculture accounts for 21.9 percent; oil and gas accounts for 14.9 percent; and manufacturing for 6.81 percent. However, as the preceding paragraph shows the contributions by the non-oil sectors to export earnings and government revenue fall far short of their share of the economy.
While the current emphasis by the federal and states governments on diversification, with a focus on Solid Minerals, Agriculture and Tourism (SMAT) sectors, is to be applauded, each of these sectors faces particular challenges. We can glean the export earning potentials of these sectors from the recent pronouncements of senior government officials. The Minister for Solid Minerals Development told the National Assembly in February 2016, during the defence of his ministry’s budget, that Nigeria could earn about N250 billion per year from solid minerals. The Director General of the Nigerian Export Council also said in February that Nigeria could earn $25 billion per year in non-oil exports by 2025. These projected earnings pale into insignificance compared to the annual export earnings from oil.
Nigeria has vast mineral resources comprising 44 minerals in commercial quantities. However, there are two main problems with exploiting solid minerals at this time, especially if its focus is on export. As Sharmin Mossavar Rahmani has written in her article, Biggest Threat from China Slowdown is US Overreaction, in the Financial Times on 28 January, 2016, “China’s demand account for 50-60 percent of production of iron ore, nickel, thermal coal and aluminium and a significant share of copper, tin, zinc, and steel.”
The slowing growth in China has led to the significant decline in the prices of solid minerals. Yet Nigeria appears poised to increase solid minerals for export at a time when there is a price melt-down. The second problem with solid minerals exports strategy is that it will deepen Nigeria’s dependence on primary commodities, thus consigning Nigeria to the “potato chip” instead of the “microchip” spectrum of the global production chain. One lesson that Nigeria should have learnt from its 40 years of oil-dominated economy is to move the country up the value chain: It should increase its solid minerals production not for exports but for its own industrialisation. Increased production of agricultural products should also be aimed first at meeting of the country’s domestic needs, given that Nigeria currently spends N20 billion per week on importation of a wide range of food and agricultural products. More importantly, Nigeria should focus its efforts on adding value to its food and agricultural products with a view to exporting processed agricultural products. Tourism prospects in the country are blighted by insecurity in many states reflected in kidnappings, abductions, agitations and insurgencies.
It is often thought that the reason that Nigeria has not made much progress in solid minerals development and even agriculture is the lack of appropriate incentives, legal, regulatory and institutional framework. These explain a part of the equation for lack of progress. The other part, and increasingly a major reason, is that Nigeria continues to lack the critical mass of scientific and technological capacity to achieve the linkages in the various sectors. The oil sector provides a striking illustration. Nigeria imports half of its daily consumption of petrol of 40 million litres. Nigeria also loses N2 trillion ($10billion) yearly to petrochemical imports. Dependence on foreign sources for these items reflect the fact that the local firms are neither able to refine enough petrol nor manufacture foam, paints, plastics and textiles needs, which would have been met by a national petro-chemical plant. Foreign investment can help in filling that void. But unless there is national scientific and technological capacity to run such a plant, foreign investment can quickly turn into a vehicle for importation of foreign technical expertise. The second lesson is that building the country’s scientific and technological capacity holds the key to sustained diversification.
As the importance of oil recedes as a source of government revenue, the moment is opportune to find a new approach for budgeting at the federal and states levels. In much of the 40 years of oil-dominated political economy, the federal budgets have been prepared and implemented on the basis of the prevailing oil price. In other words, the budget was benchmarked on projected oil price. In 2004, this approach was modified with the introduction of oil-based fiscal rule, under which the budget projections were based on less than prevailing or projected oil price. This fiscal rule was both intended to avoid wild swings in expenditures and, more importantly, to save the excess revenue above the benchmark price. The Excess Crude (oil) Account [ECA] was born out of this approach. Now that oil might become less dominant as a source of revenue, the time has come to consider another variable for benchmarking budget preparation and implementation. Nigeria can learn from the experience of other countries, where budget revenue is benchmarked on economic growth rate: The higher the growth projections and the greater the share of particular sectors of the economy, the more revenue that the government garners from such sectors.
Some current political leaders and business elite look back with nostalgia to how the old regions of the federation competed among themselves in socio-economic development. But this occurred in a different political economic context. Then, the derivation formula was based on 50 percent of accrued export earnings being allocated to the regions and each of the regions had huge agricultural export earnings. None of these conditions exist today. Thus, reviewing the Constitution to give the 36 states greater fiscal autonomy – and responsibility — will be crucial to charting a vibrant post-oil strategy for the country.
Ambassador Otobo, a Harvard trained Economist, retired Ag. Assistant Secretary General (ASG) at the United Nations, New York is a Non-Resident Senior Expert in Peacebuilding and Global Economic Policy at the Global Governance Institute, Brussels, Belgium and member of the Editorial Advisory Board of The New Diplomat wrote in exclusively for The New Diplomat from his base in New York.