OPINION: Coronavirus, Oil Prices And The Need For Economic Diversification, By Michael Onjewu
The novel coronavirus pandemic which started in the Chinese city of Wuhan in December 2019, has left almost 12,000 dead and infected 288,011 persons in 186 countries worldwide.
In Nigeria, 22 persons have been infected while government at all levels are putting measures in place to prevent a spread.
The lockdown caused by the virus has taken a toll on the global economy, affecting demand, supply, stock markets and oil prices leading to loss of jobs, dwindling revenues and economic decline.
The quarantine caused by the pandemic has resulted in a reduction in the demand for oil in the transport and manufacturing sectors. This and the supply dispute between Russia and Saudi Arabia led to the crash in the prices of crude oil globally - worst since 2002. Crude oil now sells below $30 per barrel based on official OPEC price.
Nigerian runs a mono-economy that depends exclusively on oil revenue for sustenance - with the annual budget financed from the proceeds of crude. The 2020 budget of N10.59trillion was initially pegged on a crude oil price of $57 per barrel before been forced back to $30 per barrel due to shortfall in oil revenue. This implies that Nigeria won't be able to finance the 2020 budget fully. Expectedly, the federal government was forced to review key projections of the budget by reducing capital and recurrent expenditures by 20 and 25 percent respectively.
With the shortfall in revenue, Nigeria is on course for another economic crisis - as all key indicators point to recession. Inflation rate has risen to 12.20% from 11.98%, exchange and unemployment rates are rising and the disposable income of the citizens is decreasing. Consumption, investment, government expenditure, and net export are all on a decline.
The Central Bank of Nigeria (CBN) in a bid to cushion the economic effect of COVID-19 introduced palliatives which include the immediate reduction in interest rate from 9% to 5% per annum for one year, effective March 1 and the creation of N50 billion targeted credit facility for small and medium scale enterprises as well as households.
It is unlikely that these measures rolled out by the Central Bank of Nigeria (CBN) and the recent reduction in the price of petrol from N145 to N125 will cushion the impact of the global economic turmoil on the Nigerian economy. The overdependence on oil revenue for decades implies that the Nigerian economy is a function of the volatility in the crude oil market.
NEED FOR ECONOMIC DIVERSIFICATION:
The critical burden hindering the growth of the Nigerian economy is how to diversify its revenue generation base; which has consistently depended on the earnings from crude oil. The Nigerian economy may go down the drain if alternative sources of revenue generation are not urgently made towards sustaining the drive for diversifying the revenue base of the economy. The diversification of the Nigerian economy is necessary because of the volatility of the international oil market which brings instability to government revenue. Also, the importance of export to a nation’s economic growth and development cannot be over-emphasized.
Nigeria is characterized by low output growth, high unemployment rate and rising inflation making the economy perform below its potentials, especially in recent years. This is because the economy remains extremely vulnerable to external shocks, particularly the vicissitude of world oil market prices being the mainstay of the Nigerian economy.
The time has come for Nigeria to use this opportunity and pay more attention on accelerating the rate of growth and development through the non-oil sector of the economy. Non-oil revenue sources are bound in Nigeria - agriculture, taxation, mining and tourism to mention a few.
If properly mechanized, cash crops like rice, cassava, groundnut, and cocoa can be a huge revenue earner for Nigeria. Available statistics indicate that the contributions of agriculture to GDP decreased to N5093.98bn in the fourth quarter of 2019 from N5408.98bn in the third quarter of 2019. This sad reality is a pointer to the minimal attention placed on the sector.
Also, despite generating N5.3 trillion from taxation in 2018, Nigeria's tax to GDP ratio remains one of the lowest in Africa at 6.1%. If all taxable entities are properly captured in the tax net, tax revenue has the potential of contributing significantly to the growth of the Nigerian economy. Solid mineral deposits and tourism are lying fallow and left to rot away by governments at all levels.
As the country’s budgets adjust to a new fiscal reality, careful management will be necessary to protect long-run investment in infrastructure and social development and avoid unnecessary cuts in essential public expenditure.
Michael Onjewu is a writer and public affairs analyst. He tweets @MichaelOnjewu