It was announced that on August 31st, following two consecutive quarters of negative economic growth, Nigeria, one of Africa’s most prominent economies and the continent’s most populous nation, had fallen into recession. Given that in April 2014 Nigeria was boasting that it was Africa’s biggest economy, thus overtaking South Africa, one must not ignore the potential impact this downturn will have on the country; in fact, IMF data projects a -1.8 percent change in real GDP for 2016. Whilst the effects might be relatively clear in the minds of those at the African Union, I want to discuss how Nigeria should recover by escaping the curse of the Dutch Disease and diversifying its oil-dependent economy.
In looking at data from 2015, Nigeria’s total value of exports stood at $45,365 million. Within that figure, a whopping $41,818 million came from petroleum export (OPEC, Annual Statistical Bulletin 2016). Looking at that in terms of Nigeria’s total balance of payments, petroleum export revenue represents over 90 per cent of total export revenue. What can be deduced from this is just how vital the oil industry is to the Nigerian economy, and how volatile its economic position remains as a result of oil price fluctuations and continual oil price crises. It isn’t difficult to recognise that there is a lack of economic diversity, and if the government are to avoid further economic downturn in Nigeria, changes must be made; the country must now turn to other industries. Related issues have also been mirrored in similarly oil-dependent Saudi Arabia and both countries are having to now make fiscal adjustments following a series of oil price crises. Nigeria cannot continue spending its oil revenues without saving and cannot spend on consumption without building the future economy.
If one looks at the economic data from the second quarter of the year, one could be optimistic about Nigeria’s future. Nigeria’s non-oil sector was driven by the agriculture, information and communication, and services sectors, all of which are potential areas for economic diversification. These potential rescue sectors for the Nigerian economy, most prominently agriculture and telecoms, both grew in the second quarter of this year, with agriculture alone growing some 4.53 percent, compared with 3.09 percent in the first quarter (National Bureau of Statistics). Following the country’s official recession diagnosis, the Nigerian government has set a 10 percent annual growth target for the agricultural sector and for good reason. Take this example: A 50kg bag of rice, likely imported from Thailand, now sells for 20,000 naira ($63) compared to 8,000 naira at the beginning of the year. What this suggests is that rising inflation is complicating the economic turmoil in Nigeria and one way to kerb this would be to reduce import volumes and instead produce its own goods for local needs. This will not be difficult for the country given its 84 million hectares of arable land.
However, this would involve government spending in terms of providing infrastructure like good roads, electricity, water and finance to support farmers. While not everyone would agree with this potential rescue plan, given its Keynesian economic ideals of spending one’s way out of a recession, government investment in infrastructure could be part of a sound rescue plan for the Nigerian economy.
Another potential part to Nigeria’s rescue plan and economic diversification should surround growing its telecommunications industry. Nigerian mobile-phone customer numbers have hugely increased over the last decade as handsets became cheaper and data services have increased. In terms of Nigerian GDP, telecommunications provides more than half of the country’s foreign direct investment- if we remember C+I+G+(X-M), then one could argue that to counter Nigeria’s loss in export revenue following numerous oil price crises, the government could encourage more FDI via the growing telecommunications industry. In fact, given that the Nigerian telecoms sector is among the fastest growing telecommunications markets worldwide, the country is certainly in a good position to encourage this. To do so the Nigerian government would have to provide confidence for foreign investors following previous political instability in the country as a result of constant coups and counter-coups and the subsequent fear of Nationalisation. It would also have to improve and invest in the country’s infrastructure and perhaps maintain a stable regulatory policy that will encourage investors to boost this industry. All of this involves a degree of spending on behalf of the Nigerian government which again echoes Keynesian economic ideals.
It is then imperative that Nigeria is creative and diversifies its economy in order to recover from its recession diagnosis. Government ministers are beginning to recognise the need for diversification with Nigeria’s finance minister stressing that, “We have to grow our non-oil economy.” Indeed, since this wake-up call, positive steps are being made in non-oil sectors.
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