A former Nigerian Head of State was once quoted as saying, “Our problem is not money, but what to do with money.” This was in the days of the oil boom when huge amounts of petro-dollars were pouring in. Nigeria was one of the very few countries that had discovered the black gold. Many countries had economic cooperation agreements with Nigeria with a view to the benefits of oil production. Patronage was almost at Nigeria’s discretion as exporter, and not at the importer’s discretion.
This was in addition to a very robust agro-economy. Nigeria was a major exporter of such agricultural products as cocoa, peanuts, cassava, palm oil, cotton, rubber,etc. As a matter of fact, agriculture was the bedrock of the economy before the discovery of oil. The balance of trade was positive and the economy was very robust.
On 1 January, 1973, when the naira and kobo became Nigeria’s currency (to replace pounds and shillings),
the exchange rate was 0.658 naira to 1 dollar. In other words, 1 naira exchanged for
1/0.658 x 1 = 1.51 dollars meaning that the naira was stronger than the dollar. In 1980, the naira was even much stronger, exchanging for 1.81 dollars officially, and 1.11 dollars on the parallel market (PM). In 1981, however, the naira began to slide steadily against the dollar; and in 1986, for the first time ever, it fell below the US dollar and exchanged for 2.02 naira to the dollar officially, and 3.90 naira (PM).
In the 1990s, the naira remained fairly stable at 21.89 naira to the dollar officially, but with a wider gap on the parallel market at an average of 80 naira to the dollar. Between the years 2000 and 2001, the currency resumed its descent, hitting an all-time low and exchanging above 100 naira to the dollar.
POINT OF INFLECTION
In pre-independence Nigeria and up till the end of the civil war, agriculture was the mainstay of the economy. Crude oil was discovered in commercial quantity in 1956 and became a major revenue earner for the country in the 1970s during the oil boom. It was during this period of oil boom that the country chose the path of least resistance and shifted its dependence from agriculture to the oil sector.
That oil now plays a pivotal role in the nation’s economy cannot be over-stated. Nigeria is the sixth largest oil-producing country in the world, and almost all developmental projects hinge on expected revenue earnings from crude oil exports. Explicitly, about 90% of the annual budget is predicated on a forecast of crude oil price per barrel, to the neglect and detriment of other sectors, especially the agricultural sector.
The economy therefore became a mono-economy, lacking diversity in revenue sources; and the huge foreign exchange inflow created a false sense of affluence. Incidentally, crude oil is like any other commodity and responds to the forces of demand and supply. This is in addition to the price volatility sometimes triggered off by geo-political dynamics of conflicts, sanctions, wars and natural disasters. Over the years, international crude has often experienced wide price swings from very low to very high, from as low as $10 per barrel to as high as $150 per barrel.
THE TURNING POINT.
From 2010 to mid-2014, world oil prices remained fairly stable at around $110 per barrel, but have since been on a steady decline to the point where you can now keep a barrel at home for less than $40. And this is due largely to supply factors rather than demand factors.
The United States which used to be a major importer of crude oil has suddenly discovered large quantities of oil in its backyard, and has now attained energy-independence. US production levels are said to have surged to their highest in almost 30 years. For several years, the West imposed sanctions on Iran and placed an embargo on its oil exports in order to influence its nuclear policies. Now with sanctions lifted, Iran’s production taps have been turned back on. Many more countries are discovering oil, and production from countries outside the Organization of Petroleum Exporting Countries (OPEC) is very high. This is further exacerbated by the reluctance of the cartel itself to cut production.
On the demand side, advances in technology have led to the discovery of alternative sources of energy and the production of energy-efficient vehicles. Furthermore, weak eeconomies in Europe and developing countries, coupled with a mild winter in recent times, have meant a drastic drop in energy requirements. Simply put, the world is pumping out more oil than the world needs.
It does not require rocket science or extensive knowledge of economics to know that such a glut will naturally cause a crash in prices. In actual fact, analysts predict a further slump except urgent action is taken to stem the tide.
The impact of low oil prices on a mono-economy like Nigeria is far-reaching. Oil exports to the US, which used to be the largest consumer of Nigeria’s oil, have plummeted to a zero level owing to the former’s new-found self-sufficiency. In essence, Nigeria must now cut production or discover another destination for its excess crude.There are therefore the problems of low volume and low value of oil exports. As a consequence, the country is now experiencing a significant shortfall in its foreign currency earnings (or foreign reserves), which are a function of the volume and value of exports. And evidently, the value of the naira is inextricably linked to the size of the foreign reserves in direct proportion. Therefore the substantial reduction in the size of the foreign reserves has led to a plunge in the value of the naira, pushing up the exchange rate to the current level of about 300 naira to the dollar unofficially.
Nigeria is an import-dependent country, importing almost all its needs, including food, which must be paid for in foreign currency. Very few goods are produced locally. With the dollar now more expensive, the importer pays more for the imported goods and must correspondingly pass the cost to the consumer, to remain in business. Prices then go up, resulting in inflation.
A market survey conducted by The Security Watch gives a useful insight into the unprecedented level of inflation being currently experienced.
Item Old Price (Naira) New Price(Naira)
Rice (50kg bag) 9000 12,500-13000
Cooking Oil (25 litres) 5,500 9,500
Brand of Noodles (1 carton) 1000 1200
Chicken (1 kg) 750 950
Chocolate Powder (400g) 450 550
Bread (medium loaf) 200 200-250
Biscuit (small pack) 10 15
Sachet of water 5 10
Brand of Soap (1 pack) 350 450
Cooking Gas Cylinder (12.5kg) 6200 8000
Generally, prices have gone up.
THE ROLE OF CORRUPTION
Nigeria is the biggest economy in Africa, following the recent re-basing of the economy, and ought to have the capacity to weather the storm in the event of any major shock in the international commodities market. Unfortunately, years of mismanagement and lack of accountability have left the country almost bankrupt and insolvent. We recall that before this administration, Transparency International rated Nigeria as the second most corrupt country in the world. Corruption was brazen, endemic and pervasive. The door to the treasury was virtually flung open to political cronies, who had their sacks filled, pressed down shaken together and running over. This has left the country’s wealth concentrated in very few hands, leaving the rest of the population in abject poverty. With the minimum wage at 18000 naira, the average Nigerian subsists on less than $5 per day.
HIGH LEVEL OF IMPORTATION.
Other factors that have helped to deplete the nation’s reserves, analysts say, include the unquenchable preference for imported goods to the few locally manufactured ones, remittance of school fees abroad and medical tourism. Economic experts are of the view that curtailing our thirst for imported goods and encouraging local manufacture will help to save scarce foreign exchange and create jobs. They further argue that there are enough good schools of international standard, and enough good healthcare facilities to provide the medical needs of the country. Therefore, if anyone considers themselves affluent enough to seek education or medical attention overseas, it behoves them to seek funding sources for their needs, rather than be subsidized with scarce foreign currency at the official rate, at the expense of majority of Nigerians.
Economic experts also agree that the most critical factor affecting the nation’s foreign reserves is the importation of refined petroleum products for domestic consumption. Paradoxically, Nigeria is the only oil-exporting country that imports refined petroleum, much like exporting firewood and importing charcoal, or exporting chicken and importing eggs. This has been the practice by successive governments since the days of military rule. Nigeria has four major refineries none of which is producing at installed capacity, owing to lack of proper maintenance; hence the inability to meet domestic requirements. The nation is therefore left at the mercy of a dollarized supply system that depends on importation; and with the dollar so scarce and expensive, fuel scarcity becomes a recurring decimal. Economists are of the view that the permanent solution to the problem is the complete overhaul of the existing refineries and construction of new ones.
It is generally believed that it is sheer folly to do things the same way always and expect different results. Thankfully, the present government came to power on the mantra of change. President Buhari himself has been adjudged the least corrupt leader in Africa by the international community, and has taken the bull by the horn in the fight against corruption.
The dependence solely on oil for revenue is analogous to putting all eggs in one basket, and has been largely responsible for the instability in the economy. The current low oil prices underscore the need to reverse the trend and diversify the economy. Nigeria is blessed with abundant human and mineral resources, and vast arable land for farming. To attain self-sufficiency in food production, it is imperative to reposition agriculture to an organized and mechanized level. Under Buhari, expectations are high.