Confronting Nigeria’s critical economic challenge
Very often, we say that the way to solve our economic problem is to diversify our economy. But the truth is that Nigeria’s economy is fairly diversified right now. Current GDP figures give credence to that fact. As at half year for example, non-oil was contributing about 90% of our GDP, leaving the ‘almighty Oil & Gas’ with only a paltry 10%.
The key contributors to our GDP were agriculture (9.7%), trade-wholesale & retail (21.55%), manufacturing (9.93%)-close to oil & gas; construction (3.99%), real estate (6.46%); other services including telecommunications and financial services (4.08%)
Today, the structure of our economy gives an impression of a sophisticated economy where services contribute more to the economy than industry (50% vs 21%)
The tragedy of our economy today is that oil & gas, which contributes only 10% to GDP is the one we depend upon for about 90% of our foreign exchange. Which is to say that the non-oil sector, which contributes nearly 90% of GDP contributes less than 10% of our foreign exchange inflow. Therefore our critical economic challenge is how to make agriculture, manufacturing, refining, solid minerals, trade, construction, real estate , financial services ,entertainment, etc begin to yield foreign exchange. In other words how do we internationalize our productive activities? Foreign exchange inflow from crude oil and gas amounted to $394.7 billion between 2011-2015 while total inflow from non-oil was a paltry $28.39 billion for the same time frame.
In my view therefore, given that scarcity of foreign exchange is the most critical challenge that we have, our policy focus should be primarily on how to bridge the supply gap and over time bring overall reduction in demand. I believe that where to start is to review our traditional sources of foreign exchange and evaluate which can be enhanced in the short, medium and long terms. Between 2011-2016, the ten biggest foreign exchange earners for the country were: crude oil & gas ($394.7bn), workers’ remittances ($103.12bn), portfolio investment ($ 43.98bn), foreign direct investment ($ 30.95bn), non-oil ($ 28.39bn), other investments ($ 13.28bn), current transfer- general government ($ 9.28bn), investment income ($ 4. 35bn), transport freight ($ 3.28bn), transport others ($ 3.07bn).
Other two significant contributors were government services ($ 2.80bn) and travel services ($ 2.68bn).
The critical work by our government is to take each source and find ways to motivate increased inflow from such source. As I have repeatedly counselled, we need to take a hard look and work with industry experts to see how each sector can be stimulated to increase inflow of foreign exchange to cushion the decline from oil and gas. It must again be re-emphasized that central to all this is the creation of an investment friendly environment. And much of that can be achieved with some sensible policies. Some of the recent pronouncements of the Minister of Investment, Industry and Trade seem directed in this direction. I believe for example, that the resuscitation of the Export Expansion Grant (EEG) will spur increased foreign exchange earnings in the non oil sector. Being the major component of our GDP, focusing on getting the real sector – agric export, export- led manufacturing and solid minerals export should help to truly diversify our foreign exchange sources and help us confront Nigeria’s economic challenge.
On the reverse side, we need a medium to long term strategic plan to reduce the foreign exchange out flows by focusing on domestic development of alternative sources and capacities. In the same time frame that we looked at above (2011-2015), the major beneficiaries of the foreign exchange earned mainly from oil were: financial services ($78.35bn), oil sector ($ 46.42bn), industrial sector ($41.63bn), food products ($ 24.22bn), manufactured products ($22.86bn), transport sector ($8.02bn), business services ($7.89bn), transport services ($5.74bn), other services ($5.63bn), minerals ($2.89bn). Other sectors that consume significant volumes of our foreign exchange include, communication services ($2.74bn), agric sector ($1.68bn), education sector ($1.58bn), and environmental services ($1. 33bn).
What will be most expedient is again to involve the experts and stakeholders in each of these sectors and do a painstaking review of a deletion, replacement and forbearance strategy that will progressively allow the nation source as much of these foreign exchange-guzzlers from within or from less forex-demanding sources. It is indeed gratifying that some effort seems to be directed in this direction. The increased focus on increasing local production of rice for example will help reduce food imports. Same can be done in other sectors in a systematic and phased strategy that is agreed by stakeholders. I recently heard that the CBN is considering assisting local investors to produce some of the 41 items it banned from accessing forex from the foreign exchange market. While this sounds good, but it looks like putting the cart before the horse. An agreed deletion or replacement programme would allow manufacturers a smooth transition and would have avoided the unsalutary shock the ban gave and continues to give to Nigerian manufacturers.
Nigeria needs to improve productivity and increase investment into the economy-public but especially private investment. But in doing this, a well honed strategy laden with incentives that will expand foreign exchange inflows through many sources, with a medium to long term view of reducing imports in a systematic and well phased manner becomes imperative and must receive prime attention from our economic managers.
Mazi Sam I. Ohuabunwa