Nigeria reported a 1.4% GDP growth rate for the third quarter; the second consecutive positive growth rate this year (it reported 0.7% in the second quarter) since the recession triggered by the 2014 oil glut. It is a sigh of relief, at least on paper. Notwithstanding the raging debates on the representativeness of such figures in light of conditions on the streets, it was still welcome news. But it begs a deep reflection.
As early as 2011, the then governor of the Central Bank Sanusi Lamido Sanusi (now HRH Emir of Kano) had warned of the risks of possible macroeconomic shocks (especially a glut in oil price) on the exchange rate and the stability of the country’s financial system. This was during the Lagos subsidy debate. Most people chose to focus on the immediate issue of fuel subsidy, thereby paying deaf ear to his warnings. He had predicted possible weakening of the Naira to 200 to the dollar. It fell to 365 (even 500 on the black market). He predicted a possible 50% decrease in the price oil. The commodity lost up to 62% of its pre-crisis price at the height of the glut. He predicted possible difficulties in paying salaries. Civil servants went without pay for more than 6 months. And some states have owed workers up to 12 months in pay and benefits. And the list goes on.
The recession came, and came hard. Anyone who lived in Nigeria at this time, especially middle and low-income earners, felt the pinch. And no, you didn’t need an economics degree to understand that prices of goods in the market had more than doubled. Nigerians have had to endure the twin problem of inflation and economic stagnation; the worst nightmare of any economy. But we lived through it. Now that the economy is gradually taking a positive turn (or is it?), there is the need to ask what lesson, if any, can be learned from our experiences in the past two years.
Ask any Nigerian what the biggest problem with the Nigerian economy is; chances are, you’ll hear about our over-reliance on oil. Economic policymakers and ordinary citizens on the street share the same view, especially in the past two years where the country witnessed a glut in oil prices as well as attack on oil infrastructure for political reasons. Nonetheless, this has almost become an anthem which we’ve been singing for more than 20 years. At the height of the boom in 2014, oil export revenues made up about 85% of government revenues and 90% of total foreign exchange earnings. This directly affects both fiscal stability and monetary policy effectiveness (since the Central Bank operates a managed float system dependent on foreign reserves), further weakening the supposed mutual exclusivity of both sides of the financial system.
Today, Nigeria is at a crossroads where she has to decide whether to use the experience of the past two years as a catalyst for real economic diversification or continue with business as usual by singing the diversification anthem and doing nothing. The crisis forced us to make certain adjustments. Prior to the crisis, we had spent upwards of $20 billion on food and other agricultural imports. Hopefully, lack of foreign earnings has forced both a reduction in imports and the promotion of local products. However, beyond food, importation of refined fuel takes another huge chunk of our importation bill including direct subsidies on fuel as well as foreign exchange operations on behalf of oil marketers. As the former CBN governor once said, rather than subsidize imported products and create jobs abroad, there is the need to subsidize domestic production and support those willing to invest in domestic processing facilities. And no, this isn’t an article advocating blind protectionism. And it needn’t. In line with the laws of comparative advantage in classical economics, domestic processing facilities in agriculture and energy production directly complement our resource abundance in both sectors. In addition, a more rational import policy would help stabilize our currency and save Nigeria from a repeat of the kind of stagflation we’ve endured for the past two years.
In conclusion, it is worth commending the diversification drive in the country’s mining sector, the recent investments in refineries by local investors, and the creation of the Development Bank of Nigeria to further support medium and small-scale businesses. These are steps in the right direction. But there is the need to avoid the danger of complacency especially as the economy increasingly improves and easy money from oil becomes attractive for fiscal purposes as well as a source of foreign reserve. There is the need to further diversify the economy thereby protecting the country from single-commodity risk and its attendant consequences on the Nigerian people. Hopefully, the silver lining in the cloud of recession would be a more rational economic policy henceforth.