In the meantime, Nigeria is faced with overlapping problems. Crashing oil prices have battered the government’s revenue projections. But they will be even more costly for Nigeria given a recent amendment of the production sharing contract between the government and oil companies. Under the new terms, created to further boost oil income, the government would have earned additional revenue from royalty payments in line with increases in oil prices. The current price levels mean the government is earning much less from those royalty rates than it projected at the start of the year.

Yet, that’s not all. Nigeria is also faced with lower output given a record deal for production cuts agreed by OPEC members on April 12 in response to falling prices. That means even lower revenues, given that Nigeria’s earnings capacity from oil is directly linked to its production and export levels. With Nigeria’s production costs standing at $30 per barrel, current oil price ranges mean that Africa’s largest oil producer is either selling its biggest export at a loss or barely breaking even.

These interconnected realities paint a grim picture for Africa’s most populous country. The International Monetary Fund (IMF) already predicts Nigeria is headed for its worst recession in 30 years.

“The economic impact is likely to be quite severe,” says World Bank country director for Nigeria, Shubham Chaudhuri, speaking from Abuja, the federal capital. “Most people, including the government, were looking at a contraction in the 3% range. But it could be higher—it depends on how oil prices recover and the efforts to contain the pandemic.”

After years of rhetoric followed by inaction, the effects of the pandemic will force Nigeria to confront the prospect of a reality without oil earnings and the need for a more sustainable approach to diversifying its earnings.

Ghosts of habits past

Nigeria’s increased exposure to low oil prices is due to a lack of a significant savings buffer, particularly when compared to countries like Russia, Norway, and Kuwait, which have built robust cash reserves from oil savings. “Coming into this year, Nigeria had very low fiscal buffers so we came into this crisis unprepared,” says Wale Okunrinboye, head of investment research at Sigma Pensions. That reality is reflected by its Excess Crude Account (ECA), which had a balance of $71 million in early March—down from $20 billion in 2008.

First created in 2004, the ECA was intended as a savings account for additional dollar earnings when Nigeria’s oil exports are sold above the government’s assumed benchmark price. The long-term goal was to create a robust savings buffer to insulate the economy—and government spending—from the repetitive boom-bust cycles of oil prices. But with the ECA not backed by the constitution, its legality has long been a subject of contention. State governors have consistently challenged the federal government’s authority to save the extra earnings rather than share them among tiers of government as oils earnings typically are.

That contention, and the constant fiscal demand from states, mainly to pay salaries of civil servants, resulted in a drop in oil savings, especially during the price boom of the early 2010s. “Most of the problems we’re having today are the fallout of the things we did between 2010 and 2014,” Okunrinboye says. “The potential to save more was there, but the government didn’t have the political will.”

On the evidence of the past decade, Nigeria’s needs to create “a counter-cyclical public spending behavior to oil,” says Debisi Araba, managing director of African Green Revolution Forum, a collective advocating for sustainable agriculture development across the continent. “Nigeria needs to spend less when we’re making money from oil [and] we need to use the savings as a stimulus when oil falls. But what we’ve been doing for the last few decades is spending almost everything and then when the oil prices fall, we borrow.”

President Muhammadu Buhari’s immediate response to the economic crisis shows a repeat in that trend: in addition to rewriting the budget to adjust for lower oil prices, the administration has also taken out a $3.4 billion loan from the IMF. It’s a move that inflates its mounting debt exposure—which stood at $84 billion in December 2019.

Nigeria’s debt-to-GDP ratio has been a relatively healthy 17.4%, below the sub-Saharan Africa average of 28.7%—but analysts say that’s not the point. “Nigeria’s problem isn’t debt, it’s about servicing the debt,” says Marco Hernandez, the World Bank’s lead economist for Nigeria.

The country’s challenge with debt is the same problem across the rest of the economy. Oil is the only significant revenue source when gauging Nigeria’s ability to make debt repayments. And it goes beyond just the oil industry.

“Many of us underestimate what this oil price crash has meant for Nigeria’s non-oil sector,” says Yvonne Mhango, Sub-Saharan Africa analyst for Renaissance Capital. “The wider economy was already struggling.”

Bracing for impact

The government is considering some old ideas to help come to grips with these new problems. It has ordered the implementation of an eight-year old report which proposes reducing the size of the government by scrapping and merging agencies that have duplicate functions. But it’s a measure that’s likely to prove inadequate in the face of the worst economic crisis in recent history. Around 40% of Nigeria’s initial 2020 budget was earmarked for recurrent expenditure, including civil service costs.

For ordinary Nigerians and business people, one of the earliest telltale signs of an economy going south is the travails of Nigeria’s currency, the naira. For the last decade, economists and business leaders have quietly and in some cases, loudly, called for the government to stop artificially buffering the naira and to let it find its true value by floating. But instead, for many years now, the Central Bank of Nigeria has managed the naira with multiple values versus the dollar, depending on who’s buying foreign exchange.

In April, Nigeria’s Central Bank promised the IMF that it will allow a more flexible and unified naira in response to the economic crisis, and would only intervene when there were large fluctuations.

“It’s commendable the Central Bank has been quick to move from the official dollar rate of 305 naira to 360 naira,” says Mhango. “But the devaluation fell short of where the currency should be. Our fair value at RenCap is 410 naira to the dollar.”

What if the oil runs out?
What if the oil runs out?
Image: REUTERS/Afolabi Sotunde

As the government talks more about exports beyond oil, liberalizing the country’s forex policy will be crucial, suggests Andrew Alli,  group chief executive at SouthBridge Group, a pan-African investment bank. “This will allow a move from a situation where the government is virtually the only provider of forex, and enable a proper market where people sell what the market requires.” As Alli sees it, by allowing the market to moderate supply and demand for forex, more investors will be encouraged to invest more in export-earning industries—the very aim the government professes to support.

The need for an economic course correction, through broad and consistent investment in other sectors, is necessary as Nigeria faces a global crisis that is cannibalizing its oil-dependent economic model, Araba says. “How do we keep dancing when the music has stopped? Even if the music hasn’t totally stopped, the song has definitely changed and we need to move lock step with it.”

Dissecting sectors

An oft-overlooked fact is that Nigeria’s economy is already about a lot more than oil. The commodity accounted for only 7% of its economy in 2019, according to Nigeria’s bureau of statistics. The agriculture, industrials, and services sectors contribute far more. But the country depends on oil for 95% of its foreign exchange earnings.

“The economy is already diversified away from oil,” says Alli. “The over-dependence on oil is really about its role in providing  government revenues and foreign exchange earnings.”

Non-oil revenues in Africa’s largest economy are dominated by income-generating government agencies and taxes. For its part, the government sought to widen its tax base two years ago with an “amnesty program” that allowed tax evaders pay up without being prosecuted. However, with an economy that is over 65% informal, more would need to be done.

“Government revenues could be addressed by expanding the tax base, including looking at innovative ways to tax the informal sector,” says Alli.

But tax revenues are also expected to suffer amid the corollary economic effects of the pandemic. Corporate profitability will shrink in the face of a recession while value-added taxes will also be impacted given the effects of the weeks-long coronavirus lockdown and expected periods of lower economic activity.

Tellingly, Nigeria’s federal tax agency has already made headlines for pleading with businesses that can afford to do so to pay their annual taxes ahead of schedule. “Sending that signal must mean they are in a desperate position…because the scale of the revenue shortfall the government is facing is huge,” Okunrinboye says.

Remittances from the Nigerian diaspora and small businesses, perhaps the largest source of foreign exchange after oil, will also plunge this year, the World Bank predicts.

As part of its attempts to build up non-oil sectors, Muhammadu Buhari’s administration has talked up plans for an “agriculture revolution.” But its methods, which have included a fertilizer initiative to ease access for small-holder farmers and a loan scheme to finance rice farming, have not been game-changing. The growth rate of Nigeria’s agricultural sector has fallen 42% since 2016, president Buhari’s first full year in office.

Insiders in Nigeria’s agriculture sector suggest the government’s tactics have been more populist than effective. Take its protectionist approach to rice, Nigeria’s most popular staple. To boost patronage of local rice farmers, the government hiked import tariffs on rice to 70%. But while local production increased, peaking at 4.9 million metric tons last year, a much higher rate of local consumption means that market gaps are still being plugged by illegal rice imports.

Another dominant view is that the government has not focused enough on solving the underlying big-ticket infrastructural problems in the sector. “We still have broken supply chain issues, inefficient logistics and transportation, and we haven’t significantly improved the efficiency of seed and fertilizer supply,” says Araba, who also served as special adviser to former minister of agriculture, Akinwumi Adesina in the previous administration. Crucial gaps in electricity supply, storage facilities and access to market also explain why 45% of Nigeria’s harvested tomatoes go to waste.


Shoring up lagging infrastructural deficits like electrification will also prove a boon for local manufacturing, allowing Nigeria to make a further shift from being an extraction-based economy. The potential advantages of increased industrialization have now been amplified by the establishment of the Africa Continental Free Trade Area—a single market for goods and services on the continent.

With its young and rapidly growing population providing a willing labor force, Nigeria can become more intent on emerging as manufacturing powerhouse with a formal, taxable, industrial base which services regional markets while creating much needed jobs.

“Entrepreneurs that can overcome the barriers to market entry and add value locally will grow quickly and build lucrative businesses while growing the size of the addressable local markets, says Amy Jadesimi, managing director of Ladol, a privately owned industrial free zone for logistics and engineering located at Lagos’ ports. “This entrepreneurial growth is critical as the Nigerian economy needs the private sector to grow to be as big as the public sector for us to lift people out of poverty and create jobs.”

Indeed, even with many significant challenges and obstacles for entrepreneurs, investors keep making a bet on the potential of a market with 200 million people.

Over the last decade, Wale Adeosun’s Lagos-based Kuramo Capital has been one of the most influential investors in the early stage through private equity space in Nigeria, particularly in up-and-coming sectors such as software and fintech. Adeosun is concerned about the macro-conditions as much as anyone, but remains positive. “I’m very optimistic about the country, the entrepreneurial spirit of Nigerians gives me hope,” says Adeosun. “We always seem to have something break in our favor. On a daily basis, when I’m trying to fund businesses, I still find the most interesting opportunities.”

Ladol’s Jadesimi is also a strong believer in the potential of Nigerian entrepreneurs and long-term investors to change the narrative against the odds in this new oil revenue-light world because that’s what they’ve always done. “The private sector is more than ready to fill the gap this moment is creating, having in some ways been actively been prevented from doing so in the past,” she says. “Local entrepreneurs, who are locally funded, can now step in and provide local solutions.”

Making it in Nigeria

Beyond investors and Nigerians’ hustling spirit, turning the country’s manufacturing potential into reality will require the government to rethink its current approach, which undercuts being internationally competitive, says Nonso Obikili, director at Turgot Centre for Economics and Policy Research. “We have been focused on the same mandate of stopping foreign products and replacing them with Nigerian ones,” he says.

It’s a stance that has also proven problematic for local industries. For instance, import bans to protect the local textile industry have also inadvertently restricted access of local manufacturers to higher quality raw materials.

Nigeria’s central bank governor Godwin Emefiele has championed the need to “look inwards as a nation” amid the pandemic. He sees it as an opportunity to boost manufacturing and attain food security with the twin aims of “supplying key markets across the country” and “dampening the effects of exchange rate movements on local prices.”

Yet, the problem with the inward-looking approach, Obikili says, is the lack of sustainable demand. In a country where around half of the population lives in extreme poverty, demand for products beyond basic commodities cannot fully serve any ambitious industrialization plans. “We cannot use non-existent demand to build a manufacturing industry. Even China depends on international exports,” Obikili says.

Indeed, there has been plenty of talk of Africa as the next factory of the world as China’s labor costs have risen. Small and medium-sized Chinese manufacturers have long targeted Nigeria as a top destination, alongside Ethiopia and South Africa. But many of the same challenges of weak infrastructure and a lack of technology transfer, among others, keep coming up, according to a recent paper by Yunnan Chen, for Johns Hopkins University’s China Africa Research Initiative.

Chen, who studies Chinese partnerships in free trade zones in Lagos and Ogun states and Benin City, sees opportunity with policy adjustments.

“For Nigerian policymakers looking to develop domestic manufacturing industries, it is clear that import-substitution policies alone are insufficient to ensure the economic spillovers from manufacturing foreign direct investment that would allow processes of technology transfer to occur,” writes Chen.

The government can also become more intentional about supporting sectors that have thrived in spite of major challenges. Last year, Nigerian tech startups dominated investment inflow across the continent. Several of these startups have evolved from scrappy ideas into operating businesses that create jobs and pay taxes.

Local software engineers, the driving force behind the tech ecosystem, have become also become subject to multimillion-dollar investments: Microsoft launched a $100 million development center initiative focused on software engineers in Nigeria and Kenya last year. In addition to facing plaguing problems like lack of electricity, startups are also beating several odds, including the government, to survive.

Ultimately, after years of being so tethered to oil, taking on the job of diversifying Nigeria’s revenue streams and fixing major infrastructural gaps will be difficult and won’t survive shortcuts, Okunrinboye warns. “We always look for quick wins but no country has built itself around a quick win—there is no immediate magic bullet. It’s always a slow painful process when dealing with very big issues. But if you don’t deal with them, they will remain big issues.”

Given the scale of planning and execution required to navigate the crisis, it’s possible that the current administration will defer large-scale reforms, focusing on staying afloat until its term expires in 2023 rather than thriving in the long term. That approach, which will likely consist of taking on more loans, while banking on oil prices to recover, is “a dangerous stance to take,” says David Evans, economics fellow at the Center for Global Development.

“If Nigeria is going to reach a day when it is not whipped around by the winds of international oil prices, it has to diversify,” Evans says. “If this pandemic shock doesn’t move them to do it, it’s hard to imagine what will.”

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