Nigeria has been depending on the oil and gas sector for revenue for decades now while other viable sectors of the economy have been forsaken. Diversification of the Nigerian economy will help build economic resilience and limit vulnerability to external factors. In this article, we’d be discussing how Nigeria can achieve economic diversification. Read on.
How Nigeria can diversify her economy would be explained below:
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Expansion of Non-Oil Economic Sectors
One of the dimensions of economic diversification that can be employed in Nigeria is the expansion of non-oil economic sectors. Since 1974 when oil was discovered in commercial quantity in Nigeria, the oil and gas sector became the most viable sector of the Nigerian economy.
Although the proceeds from the oil have contributed tremendously to the economy of Nigeria, the over-dependence on this sector of the economy made Nigeria evolve into one of the least economically diversified economies of the world. The manufacturing sector which contributes majorly to the GDP of many countries of the world has remained stagnant in Nigeria, contributing below 10% to the GDP of Nigeria for decades. In like vein, the agricultural sector and tourism, other viable sectors have not been exploited as much as they should have.
The over-dependence of oil has made Nigeria a poor country as it set in motion the exclusion of other sectors of the economy which could contribute to the GDP and bring about employment. Unemployment, inflation, and payment imbalance which manifests in foreign exchange shortages are some of the severe challenges Nigeria has been facing for decades because of this dependence on oil.
Ironically, the oil and gas sector makes minimal contribution to the economy since it’s a high-technology and capital-intensive industry compared to agribusiness and other low/medium manufacturing sectors. This is so because the oil and gas sector is geographically limited to the oil-producing regions of the country and employs relatively few people. To further expose how much of Achilles Hill the oil sector is to Nigeria, let’s consider OPEC reports on Nigeria’s importation and exportation of petroleum products from 2015 to 2020. During the five years, OPEC stated that Nigeria spent $264.57B importing petroleum products, exceeding exports of petroleum products by $43.56B during the period.
Though dire the situation may be, it’s not too late for Nigeria to let go of the “easy-come-easy-go” oil money that made her fail to diversify its economy. The country is blessed with sizable arable land, a favourable climate, and numerous natural resources that are evenly distributed. The agricultural sector of the economy is one of the most economically viable sectors of the economy that can substantially contribute to the GDP of Nigeria. Other low/medium manufacturing sectors such as the textiles and garments industry, leather processing, and consumer goods, among others, are capable of employing many people while still contributing immensely to the GDP. Examples of viable non-oil sectors in Nigeria include agriculture, solid minerals mining, construction, tourism, and cultural and entertainment services.
For other sectors of the economy to be expanded, the government would have to construct new infrastructure and maintain older ones to create an enabling environment for businesses to thrive. Electricity and the transportation system are examples of the infrastructure that the government focuses on to achieve expansion of the economy away from oil and gas.
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Export Diversification
Export diversification is one of the ways that can help consolidate economic diversification in Nigeria. In Nigeria today, the main commodities exported to other countries are crude oil, petroleum gas, refined petroleum, cocoa beans, and special-purpose ships. Although these export commodities, particularly crude oil, contribute majorly to Nigeria’s economy, the bulk of commodities imported into Nigeria, such as cars, wheat, electronics, rubber, and machinery, exceed what is being exported from the country.
To put into perspective Nigeria’s export situation, let’s consider the statistics on Nigeria’s exports in 2021 as published by the Observatory of Economic Complexity (OEC). According to the OEC, Nigeria’s top export commodities were crude petroleum, petroleum gas, refined petroleum, cocoa beans, and specialized purpose ships. The total value of the exported commodities from Nigeria in 2021 was $57.7B, of which $41.8B was accrued from crude petroleum, $8.52B from petroleum gas, and $667M from refined petroleum. From the statistics we just provided, you can see the bulk of revenue from Nigeria’s exports was oil-based.
In light of the above, there is a need for Nigeria to pay attention to exporting non-oil and gas products. More so, the drop in crude oil prices should further intensify the need for export diversification – away from oil and gas products. With export commodities from Nigeria coming from numerous sectors of the economy, there will be wealth and employment creation, a reduction of the poverty rate, and the stimulation of the economy for self-reliance. In addition, export diversification will make Nigeria more export-oriented and integrated into the global market. The agriculture sector presents enormous export opportunities for Nigeria to earn vital foreign exchange, increase its revenue base, and avoid trade deficits.
How then can export diversification be achieved in Nigeria you may wonder. For this to be achieved, the Federal Government of Nigeria, through the Ministry of Finance, the Ministry of Industry, trade, and Investment, the Central Bank of Nigeria, and the Nigerian Export and Import Bank, should collaborate to provide Nigerian exporters with export credit services, longer maturity periods, lower transaction costs, export financing, and risk mitigation services. Export diversification is a surefire way to become a prosperous nation because export trade is a catalyst for sustainable economic development.
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Fiscal Diversification
Fiscal diversification infers an increase in the number of economic sectors that contribute meaningfully to government revenues and government expenditures. This form of economic diversification of the Nigerian economy would require the government to reduce dependence on one or a few sources of finance available to it, in this case, oil, by generating more varied and sustainable domestic revenue mobilization.
The expansion of the tax base and taxation instruments or better leveraging underused tax instruments are fundamental components of fiscal diversification that the Nigerian government can employ. However, for much to be desired through fiscal diversification in Nigeria, government capacity and institutional quality of agencies tasked with identifying relevant revenue sources and collecting taxes from them must be top-notch.