Oil’s collapse: A boon to Nigeria’s economy

Nigeria's National Assembly building

Nigeria’s National Assembly building

With the halving of the price of a crude oil from $100/barrel, the cry has been one of an economic crisis for Nigeria’s economy. Oil accounted for about 65% of the federal government’s revenues in 2014, according to the IMF. The oil revenues distributed from the federal level to the states contribute significantlyto the budget of most of the 36 state governments.

Already, the Buhari government has set out to weed out corruption from the system. (A Herculean task, which arguably, he will fail to win due to the structural nature of the problem – except through deep institutional reforms.) The fiscal and monetary authorities would like to project the image that, “if only corrupt amongst us are locked away in prisons, the country will soon be on sounder economic footing.” The numbers tell a different story. For instance, if Buhari gets to rid the civil service off “ghost workers,” and recover the stolen billions of dollars from corrupt government officials, he may be able to recover a few billions of dollars. This is a few billions off a budget projected to be aboutNGN4.5 trillion (about$22.5 billion; NGN1 = $200) this fiscal year according to Bloomberg. Already, two-thirds (NGN3 trillion or $15 billion) of the federal budget will go to recurrent expenditure – payments to federal workers and the administration of federal agencies – to officials with a median low productivity. This simply constitutes a drain on finite public resources. For a developing country such as Nigeria with dire human and physical capital deficits, this is not a sustainable way to run the country in the long run. In contrast, the government will spend a meagre 12% (around NGN500 billion or $2.5 billion) of its budget on capital expenditure according to Bloomberg.

Faster economic reforms and creative thinking could help fill the vast deficiencies, which the various tiers of government cannot fix. Fixes such as empowering the judiciary; computerising government services; empowering entrepreneurs to thrive and build value-creating ventures (Nigeria ranks consistently close to the bottom in the annual World Bank’sEase of Doing Business report). Embracing a more open economy free from unnecessary embargos and tariffs; removing the oil subsidy; and beefing up the physical and human capital of the country will also go a long way.

A failure to admit that the oil market has changed – something, which seems to be the doctrine in the corridors of power and the media – will lead to the continuation of the half-hearted reform policy in the country. To borrow a term from David Einhorn, the investment manager at Greenlight Capital, the “motherfrackers” in the US shale industry may lead to the shrivelling of Nigeria’s oil industry and the economy if serious reforms are not in the offing.

The collapse in oil price does not seem to be a short-term blip, but instead, a long-term change in the oil market. Only deep structural reforms and a rejection of the going back to the bad old days of the military, will deliver strong long-term growth in economic growth, development, and living standards of Nigerians.

Photo: wuse/Flickr, used under a Creative Commons Licence.

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