Diversification as necessary policy option for de-risking Nigeria’s economy

Amid the backdrop of rising uncertainty around the globe, Nigeria managed to pick up a 3.54 per cent growth in the second quarter (Q2) of the year. The Q2 performance is 43 basis points (bps) ahead of the previous quarterly data and a slight top-up of the 3.4 per cent yearly growth projected by the International Monetary Fund (IMF).

The outlooks of several regional economies are blunted by rising uncertainty, spiraling prices and geopolitical tensions. These are already pulling growth figures towards the negative territory. For instance, the world’s largest economy contracted by 0.6 per cent in Q2, coming after a steep 1.6 per cent slump in Q1. In the same period, China’s growth waned to 0.4 per cent from 4.8 per cent in the previous quarter, forcing its central bank into monetary easing.

Europe is currently on the brink, fighting to stave off recession. The United Kingdom’s economy shrank 0.1 per cent quarter on quarter in Q2 as its gropes through one of its darkest moments in recent history. Back in Africa, growth data are revealing scanty investments and weak consumer spending amid cost of living crisis that has sent many economies spiraling. This suggests that the Nigerian data, on paper, are not as bad as expected.

But the figures reflect the historical structural imbalances that have endangered the economy’s capacity ultilisation and reduced the country to a consuming economy – a situation that has triggered persistent unemployment and foreign exchange crises. Crude, the mainstay of the public revenue, contributed only 6.33 per cent of the gross domestic product (GDP) while non-oil retained 93.67 per cent. These figures almost reverse when it comes to budget funding, and this dates back to as far as one can remember.

Last year, the ratio was 92.8per cent:7.2 per cent in favour of non-oil while it was 91.8 per cent:8.2 per cent in 2020. Whereas the non-oil creates the bulk of the jobs and drives outputs, the economy relies on crude, a sector with little impact on the domestic economy, for foreign exchange earnings (about 90 per cent) and public budget funding.

But speaking at the 33rd Seminar for finance correspondents and business editors held concurrently in Abuja and Lagos at the weekend, economists said deliberate efforts must be made to address these imbalances such that both sectors can contribute equally to FX earnings and public revenue. The experts picked RT200 FX Programme and other development roles of the Central Bank as a pointer to likely policy the government could explore to consistently improve the contribution of non-oil to FX earnings.

RT200 FX Programme aspires to raise earnings from semi and fully-processed non-oil exports to $200 billion in the next three to five years. The programme is anchored on five strategic pillars considered key to breaking the barriers to non-oil exports.

At the seminar tagged, Policy Option for Economic Diversification: Thinking Outside the Crude-Oil Box’, a leading economist, Dr. Biodun Adedipe, said the current structure is hostile to inclusive growth, adding that “a cocktail of policy options” must be adopted to break the jinx to position the economy for sustainable growth.

After a country-by-country review, Adedipe said Nigeria is about the only commodity economy that has not leveraged its resources to support and build other sectors. He warned that Nigeria could not carry on with the concentration risk posed by hydrocarbons without deliberate efforts to diversify. He recalled suggesting to the government on tying proceeds of oil sales to infrastructure funding while revenue from non-oil goes into recurrent expenditure, saying the recommendation provided a practical process for breaking the jinx of Dutch Disease.

“As it is for nations, so it is for organisations, households or industries, concentration risk is pervasive and found in practically every major aspect of the national economy,” Adedipe observed.

Declaring the seminar open, the Governor of the Bank, Godwin Emefiele, said the quest for building a more sophisticated economy anchored on agriculture, micro, small and medium enterprises (MSMEs), industrial and manufacturing exploits have become the major components of the bank’s price stability policy thrusts.

He said that Nigeria has largely depended on the oil sector for revenue generation over the past four decades and that the sustained decline in production has continued to undermine the performance of the economy. This, he said, necessitated the drive to diversify to other non-oil sectors.

“It is important that we work to create an economy that will enable us to feed ourselves, create jobs for our teeming youths and improve the standard of living of our people, with our population growing by over three per cent per annum over the past seven years, against a less than steady growth in output since 2019. Expanding the production and industrial capacity of the economy must be given special attention to ensure overall macroeconomic stability,” he said.

Represented by the Director, Corporate Communications, Osita Nwanisobi, the governor explained that the bank under his leadership had taken major steps to diversify the economy away from a largely oil-based economy through interventions such as the support to agriculture, manufacturing, health care, education, power and aviation.

He assured: “The new 100 for Policy on Production and Productivity (PPP), which is targeted at harnessing our local raw materials to increase our domestic production as well as exports through our deliberate credit and other supports will soon begin to yield quality results.”

Also speaking, the President of the Manufacturers Association of Nigeria (MAN), Mansur Ahmed, charged the government to adopt necessary measures to diversify the manufacturing sector.

Ahmed explained that while the Federal Government was taking measures to diversify the economic base of the country, using the proceeds from oil and gas, additional efforts should also be made to focus on the manufacturing sector to manufacture what is needed.

He noted the need to deepen the complexity of the manufacturing sector, viewing diversification from both horizontal and vertical perspectives.

“As the government is diversifying from oil and gas to agriculture, the manufacturing sector needs to diversify to produce goods that are required. The government must look at the entire sectors in the economy and also encourage new investments. There is no doubt that the Nigerian manufacturing sector is not producing enough even though we are in a position to do so. Our manufacturing is not positioned to produce for export hence the need for encouragement. So, while we are thinking about diversification, we must do it horizontally and vertically.

“As we go into the Africa Continental Free Trade Area Agreement, it is an opportunity for Nigeria because when you go around Africa as a whole, apart from South Africa, maybe Egypt, Morocco, there is a lack of capacity. Therefore, we need to build the capacity of our manufacturing sector to be able to produce more and improve the quality of our products.”

While reiterating the need to play on the global stage, Ahmed decried the overbearing influence of the Bretton Wood institutions, saying innovation and technology come after a long period of active involvement in production. He faulted the western-pro agencies for their advocacy of competitive advantage in global trade.

“What has brought us to this situation was that the Bretton Wood institutions convinced our political leadership that for us to even produce for the local economy, we must produce competitively with other producers that have been in the business for about one hundred years. How can we be competitive under such circumstances? These are the people that are producing tens of hundreds of units per day while our people can only do tens of units per day.

“For me, the ability to compete comes from practice and innovations come from practice. When one is doing something constantly, the idea of improving on that comes naturally. So, we need to give our manufacturers and industries time to be able to develop the capacity to meet the demands, especially at the international level. The only way we can do this is to put necessary measures in place,” he stressed.

Also, Prof. Uche Uwaleke of the Nasarawa State University said patronising locally-manufactured goods may not be effective without legislation.

“Patronising the locally made goods cannot happen with the pronouncement of executive orders and declarations. I think the government needs to move beyond that by promulgating laws that will make it compulsory for every Nigerian to patronise locally-made goods. The elite must take the lead in this regard. Look at the volumes of furniture that state governors buy when they assume office. Even at the national level, what is the percentage of local furniture to what we have in government houses, guest houses and offices?” he asked.

In her intervention, the Director of Trade and Exchange department of the apex bank, Dr. Ozoemena Nnaji, lamented that the overbearing impact of the oil sector on the economy has exposed the country to external shocks whenever there were crude oil price changes.

To insulate the economy from external shocks and foreign currency volatility, there is a need to develop new strategies aimed at earning more stable and sustainable inflows of FX through the diversification of the non-oil exports sector.

Nnaji explained that to diversify the economy, there is a need for inter-sectoral dependence and balance in the economy, adding that more sources of exports is required to reduce the overreliance on crude whose production and price the country does not control.

This, she said, led to a more stable and positive balance of payment position. She stressed the need for a more dynamic economy capable of absorbing shocks while maintaining full employment.