COULD the drop in oil price be the best thing that has ever happened to Nigeria? Africa’s biggest economy and largest oil producer is over-reliant on oil exports. More than 70% of government revenue and about 95% of foreign currency comes from oil and gas. As a result, a drop in the oil price has dramatic effects. But these effects may force positive change in the Nigerian economy, in the short and the long term.
There is no doubt of the economic tension and uncertainty in Nigeria, much of which can be laid at the door of a government too exposed to one commodity. The drop in the oil price has had a devastating ripple effect on the economy, including increased inflation, the devalued naira and decreased government revenue.
With elections around the corner, increased government spending and a possible change of leadership add to the tension.
But the negative effects of the fall in the oil price are what we already know. The story that is seldom told is that of potential domestic structural changes and the opportunity for foreign investors to make money from this environment. The possible returns from the naira still appeal to more adventurous investors. The currency has reached record lows in the past three months but should weaken only marginally over the long term. The low oil price can also present an attractive opportunity for investors with longer return horizons and who believe the markets have neared their lowest.
In addition, there are positive changes such as the implementation of the Petroleum Industry Bill, which could boost foreign investment by advocating transparency and efficiency; and the removal of the fuel subsidy and the use of the funds for state needs, or even as a buffer to withstand shocks to the economy.
A market-determined fuel price should also encourage investment in refineries and reduce Nigeria’s dependence on fuel imports.
The Nigerian budgetary committee is investigating proposals for projects to generate revenue from sources other than oil, such as a tax on luxury goods and reducing funds that are lost and unaccounted for, essentially targeting corruption. A growing diversification away from oil dependency could lead Nigeria to a more service-led economy.
According to a McKinsey report from July last year, Nigeria’s enormous consumer base means it is likely to be one of the world’s biggest economies by 2030. This, coupled with expected growth in disposable income in Africa’s largest cities, will significantly increase purchasing power. What is more, in recent years, industries other than oil, including manufacturing and communications, have begun to thrive too. According to the Nigerian Communications Commission, Nigeria had more than 129-million telephone line subscribers last year and telecoms has been the fastest-growing sector since the 2000s. These are some of the best signs that Nigeria can move away from its reliance on oil.
However, one cannot deny the risks associated with the fact that about 46% of the population is under the age of 15.
When you couple this with the knowledge that the country is also experiencing unrelenting urbanisation in cities that do not have the infrastructure to support them, social issues such as increasing unemployment, poor sanitation, inadequate education and a disaffected youth could continue to be a stumbling block for Nigeria’s potential future expansion beyond oil.
This month’s elections will be interesting to observe and will herald a clear signal, either of sweeping change or the status quo. Whoever wins, it is hoped they will recognise the pressing need for pragmatic, long-term planning and transparent governance. If so, investors will realise their aims in Nigeria.
With oil as a mainstay, or without it, a revived administration making decisions that move Nigeria closer to the long-awaited achievement of its potential as an economic powerhouse would be well worth the wait.