Economic diversification: Time to walk the talk

As Nigeria’s main revenue provider continues to dwindle, it has become obvious that the country needs to seek other sources of funding for its ever increasing needs; BENJAMIN UMUTEME writes.

A review of the federal government revenue profile in the last 10 years has shown that oil and gas earnings accounts for over 80 per cent of the foreign exchange earnings.

Oil and gas are critical to Nigeria’s economic and social performance. Oil alone accounts for 40 per cent of the country’s GDP, 70 percent of budget revenues, and 95 percent of foreign exchange earnings.

Though the non-oil sector’s contribution to Nigeria’s Gross Domestic product was 92.76 per cent in 2021; representing an estimated value of N72. 39 trillion, it is still a far cry from what the oil sector continues to contribute to the GDP.

For instance, in the Q4 GDP 2021 report by the National Bureau of Statistics (NBS), the oil sector’s contribution to the GDP was 5.19 per cent with an estimated value of N1.055 trillion.

According to the NBS, the figure was actually down by 3.68 basis points; from the 5.87 per cent contribution in the corresponding period in 2020.The implication is that Nigeria is left with no other choice than to continue to borrow to fund its activities.

And the stark reality is that Nigeria now borrows to fund consumption, especially the payment of salaries. With the Russia-Ukraine war and foreign exchange wahala, is it clear that the government needs to quickly implement all the sweet diversification talk.

The IMF report

In a 22-page paper published last year by the International Monetary Fund (IMF), Nigeria’s struggles with the challenges of diversification have been legendary.

The Fund noted that the failure to develop non-resource sectors as a result of the “Dutch disease,” the tension between short-term gains and long-term development strategies, the technical difficulties of managing resource wealth, and entrenchment of vested interests, are all drawbacks which successive administrations have battled with.

IMF noted that more often than not commodity booms often fail to lift non-resource sector growth due to the “Dutch disease.”

“During commodity booms, the resource sector absorbs factors of production from other sectors, creating the so-called “Dutch disease” that produces a decline in agricultural and manufacturing activities. The collapse of Nigerian agriculture in the 1970s is an example (Ross, 2012). In the 1960s, Nigeria was an agricultural exporter. Export crops, including cocoa, palm oil and rubber, were the primary source of export revenues. However, the surge of the oil sector in the 1970s led to a massive exodus of labour from the agriculture sector despite rising rural wages.

The cultivation of land was abandoned, leaving large tracts of land untapped. Meanwhile, booming oil exports led to an overvalued exchange rate and made imports attractive. As a result, between 1970 and 1981, export crops declined markedly by 78% in real terms and consumer imports almost quadrupled (Bevan, Collier, and Gunning, 1999). To make things worse, an overvalued exchange rate reallocated production factors to non-tradable sectors through stronger consumer demand, further widening the technological gap of the tradable sector with Nigeria’s trading partners,” the report stated.

Revenue leakages

A financial analyst, Gabriel Idakolo, told Blueprint Weekend that except the leakages in the system is addressed revenue will continue to fall.

“The oil revenue will continue to fall if the leakages are not blocked; the Petroleum Industry Bill should also be fully implemented to allow confidence of foreign investors in the sector.

“Recently, Angola has overtaken Nigeria as the highest producer of crude oil in Africa. The loss in revenue coupled with increasing debt servicing will eventually cripple the government’s plan on infrastructure,” he said.

He further told this reporter that Nigeria has for too long relied on crude revenue thereby jeopardising our chances in diversifying into other sectors.

“Nigeria used to be a major producer of palm oil, cocoa and even groundnut in the past but we have lost that to other countries. We have lost comparative advantage because of the mono economy. We had diversified then dwindling oil revenues would not have affected us this much.

“Other sectors have outperformed the oil sector from the last GDP figures which is a key pointer to the fact that we have to take diversification seriously and stop paying lip service,” the managing director of SD&D Management Limited, said.

Govt’s failures

Speaking with this reporter, a political economist, Adefolarin Olamilekan, noted that the challenge of dwindling oil revenue didn’t start today.

According to Adefolarin, rather than focusing on innovative ways of revenue generation, the country’s authorities are still glued to what the petro dollar brings.

“Regrettably, the structure of how the government conducts its businesses to make better revenues is disheartening especially, with evidence of corruption and wastages.

“And this has dealt a big blow to revenue generation and accountability in its processes. Chiefly, this in the long run has prevented meaningful development across the country as we record a shortfall in revenues, coupled with official corruption and mismanagement of whatever is left in the purse of the government.

“Particularly, also the government is now left with the option or alternatively to keep borrowing in order to meet up with financial needs.”

The development researcher was quick to add that economic diversification should not just be a fire brigade approach in response to dwindling oil revenues.

“Rather this is supposed to be done in respect to restructure the entire economic working of the country. In this regard, the question of diversifying the economy is not just a federal government burden. What are the stakes of sub-national governments? Do they have a role to play in it? Why must the entire economy diversification policy remain a centralised policy?

“For me, successive administrations have failed to incorporate economic diversification. It’s left us in the limbo of just to believe the oil revenues will serve us better.

“Sadly, economic diversification cannot be done overnight because it deals with the entire structure of the country.

“And we must see economic diversification with it linkages to power generation, roads infrastructure network, sea and air transport to improve our export earning, human capital development, agriculture value chain linkages to manufacturing to revive our industrial sector, security and transparent business registration, foreign direct investment that must conceived for concrete business not just stock market alone, inclusive financial services and insurance and many others. The aforementioned are critical to economic diversification in Nigeria.

However, a look at the policy direction of the government on economic diversification drive has shown that agriculture and specifically rice production is the pillar of its diversification agenda.”

Walking the talk

Adefolarin insisted that diversification of the economy is not a cheap talk; neither should it be a tea party or just bringing experts, businessmen and women together. According to him, economy diversification is real work that goes through the entire fabric of the Nigeria structure be it education, health, finance, agriculture, transportation communication, real estate, construction, manufacturing, tourism and hospitality, services, retail and wholesale because, if it is left for just government at the centre, we would achieve much.

More so that the recent GDP has demonstrated that there is more revenue that can be derived from the non-oil sectors.

“We just hope the government sees reasons to move beyond lip service.”

“What can be done in this regard is that we need a structure that would allow the three tiers of the government to be involved seriously in economic diversification because they all have a role to play.

“Another is that we expect the diversification to go beyond agriculture. Much more is that agricultural diversification should be structurally linked to the manufacturing sector as well as export.

“In addition, very important is legislative drafting that could help strengthen economic diversification. This legislative piece is to foster collective responsibility on the part of government agencies and institutions.

“Lastly, loopholes and gaps that lead to corruption and embezzlement of public funds must be dealt with. We are complaining of revenue shortfalls, meanwhile unscrupulous individuals are stealing from the little available funds. More so, we must tackle wastage of public funds through a system that must prioritise public funds spending and also avoid unnecessary contract reevaluation,” he said.

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