For most observers, it is an undoubted self-evident truth that Nigeria’s economy is propelled by oil, and therefore the Nigerian economy is best described as an ‘oil economy’. Why question this? After all, Nigeria has been Africa’s largest oil producer for a long time and holds the second largest oil reserves in Africa (after Libya). Nigeria has the 11th largest oil reserves in the world. So, Nigeria does have a lot of oil. This is an undisputed fact.
However, according to the National Bureau of Statistics, Nigeria’s petroleum industry contributes less than 10% of Nigeria’s Gross Domestic Product (GDP): 9% in 2015 and 8% in 2016. Is this an oil-based economy? Notwithstanding, the importance of the petroleum industry is obvious: it contributes approximately 80% of the Federal Government’s revenue and 90% of Nigeria’s export earnings.
Nigeria’s petroleum industry GDP contribution must be compared with other oil-based economies (countries that actually deserve the description). The petroleum industry contributes more than 50% of Kuwait’s GDP, this is roughly the same for Qatar, for Saudi Arabia the GDP contribution is 42% and 30% for the United Arab Emirates (UAE).
An often-repeated jingle in policy circles, is the need for Nigeria to diversity its economy away from a mono-product economy: oil. But how will Nigeria diversify its economy from oil when oil contributes less than 10% of its GDP? The focus now should be to diversify the Federal Government’s dependence on petroleum rents. Real diversification from an oil-based economy was successfully implemented by the UAE. The diversification of the UAE economy away from petroleum has been a well-articulated Government policy and priority, since the founding of the UAE in 1971. The UAE was able to survive the oil price crash since mid-2014 because the country has now become a global tourist destination, as well as a major trading and financial centre. The non-petroleum sector’s percentage contribution to UAE’s GDP continues to rise (currently 70 % up from 60% in 2000).
The real relationship between the petroleum industry and the Nigerian economy is that the Nigerian State is a rent-seeking State. The Nigerian State derives nearly all of its national revenue from the rents collected by giving external clients access to petroleum resources. So, Nigeria is not an ‘oil economy’. Nigeria is actually a gas province with pockets of oil, and these natural resources bring important rents for the Federal Government. The fall in oil prices in 2014 resulted in a drastic drop in oil revenue for the Federal Government, this reduced Nigeria’s external foreign reserves and caused the weakening of the Naira against the Dollar. The weakening of the Naira contributed to cost-push inflation of the recession.
The Honourable Minister of Finance, Kemi Adeosun, stated recently that we must urgently question the validity of viewing Nigeria’s economy as an oil economy. She described genuine oil economies as economies characterized by low population densities and abundant oil resources. The relationship between oil production and the population density: one barrel of oil produced in Nigeria belongs to 90 Nigerians (compared with one barrel for 3 Saudis, one barrel for 1.69 Qataris and 1.44 Kuwatis respectively).
Nigeria’s Vision 20:2020 sees Nigeria placed among the top 20 economies in the world with a minimum GDP of $900 billion and a per capital income of no less than $4000 per annum by the year 2020. Further analysis has revealed that Nigeria requires annual economic growth of about 11% to achieve the vision 20:2020 goal. To achieve this goal, the petroleum industry must be transformed: from being just a source of rents for the Federal Government to an important contributor to GDP growth. Other sectors of the economy will need to increase production capacity. The petroleum industry, however, must provide more consumption opportunities for Nigeria’s economy. Only petroleum production in-country for more consumption in-country will be effective. Petroleum products consumption by the Nigerian economy is currently largely the consumption of refined petroleum product imports.
Currently, 30 percent of forex demand in Nigeria is for the importation of refined petroleum products. This places enormous pressure on the Naira and harms the economy. It is not really an increase in petroleum production that will help Nigeria grow GDP, rather, it will be an increase in consumption of petroleum products produced in-country. More refineries in-country must be built to supply products for domestic consumption. Abundant demand by industries for petroleum products consumption exists: the electricity-power, petrochemicals and fertilizer industries etc. are just some industries waiting to blossom. To achieve this, we need to subject our obsolete oil mentality a re-think, a fresh vision, and connecting oil with the rest of the economy.
Dr Uyiosa Omoregie
Dr Uyiosa Omoregie, a petroleum economist