By William Kabagambe
Africa’s economic expansion over the last decade can be attributed to natural resource production and increased manufacturing productivity that has caught the attention of foreign investors. The continent is seen by some as the next economic frontier, as seven of the ten fastest growing economies in the world are located in Africa. However, as commodity prices continue to fall African, oil exporters face serious challenges in the form of depreciating currencies, corruption, and deep cuts in government spending. In many ways, Nigeria is emblematic of this reality. In 2014, Nigeria surpassed South Africa as the largest African economy with a Gross Domestic Product (GDP) of nearly $510 billion. Nigeria, like many African countries, faces serious challenges in the form of plunging oil prices, security threats, corruption, and economic turmoil. As a result, fear and uncertainty now overshadow rapid growth in the once hopeful West African nation.
Nigeria’s economy has enjoyed sustained growth for over a decade, with an annual real GDP increase of seven percent. The attractiveness of doing business in the country has caught the eye of global investors, as Nigeria received nearly $6 billion of foreign direct investment (FDI) in 2013. The non-oil sector is seen as the major driver of this new-found growth, where activity in the manufacturing, agriculture, and service industries are increasing. While Nigeria’s economy has diversified relative to other oil-rich nations such as Venezuela and Gabon, oil production remains a vital sector for the country’s fiscal revenue. In 2013, oil and gas represented 70 percent of Nigeria’s government income revenue as well as 94 percent of the country’s total export revenue.
The drop of oil prices from $105.79 per barrel in June 2014 to $30.77 in February 2016 threatens Nigeria’s economy and national budget. Less than a year ago, under similar circumstances, Nigeria slashed government expenditure by six percent as falling oil prices ate into government revenue. As in other OPEC countries, the decline in oil prices has led to a fall in Nigeria’s exports and possible drop in GDP. Newly elected President Muhammadu Buhari, who inherited most of these challenges, promised to diversify the economy when he first took office. Almost a year into Buhari’s term, Nigeria has shown impressive growth as a non-oil economy. The wholesale and retail trade sector average 10 percent growth rates annually, real estate 14 percent, and healthcare services 12 percent, all offering successful alternatives to the oil sector. While President Buhari has taken significant steps forward, the oil sector still accounts for more than half of Nigeria’s total export revenue, which continues to leave Nigeria’s economic situation in a dire state.
This recent economic downturn has also prompted renewed concerns around corruption. Nigeria’s oil cash has often served as a tool to buy electoral support. The World Bank estimates that as a result of corruption, 80 percent of energy revenues in the country benefit only around one percent of the population. Many believe that oil cash has seeped its way into all levels of government and business. Money that leaks out of state coffers will distort the allocation of funds to pay for infrastructure projects and education, and can go on to discourage private-sector development and innovation in the country.
As oil prices fall, Nigeria’s national currency, the Naira, continues to plunge along with the country’s foreign exchange reserves. President Buhari believes the devaluation of the Naira will lead to inflation and has asked the Central Bank to keep the official exchange rate strong and to restrict the supply of U.S. dollars. Buhari’s attempt to keep the naira afloat has been a mistake as the country’s total debt portfolio has risen 30 percent to $62 billion. In order to lower government debt, Buhari’s administration has proposed boosting the economy by increasing this year’s government budget by 6.1 percent, or $30 billion. Expanding the government’s budget will ease unemployment and allow for the government to pay many local and state employees that have not been paid in several months.
Boko Haram, the radical Islamist insurgency based in northeast Nigeria remains an active threat to the country’s economic and political stability. Boko Haram’s violence has not yet spread to the oil-rich Niger delta or Lagos, but the instability has affected the country’s agricultural production and led to increased food prices in the north as well as severely reducing cross-border trade with Cameroon, Chad, and Niger. Given falling oil prices, improving the security environment will be crucial to promoting a healthy investment climate in Nigeria.
In the face of these challenges, it is critical that Buhari create specific recommendations that target economic policy. The two most important policy recommendations are diversification of the economy and increasing FDI. On economic diversification, it is crucial that Nigeria promotes more exports and reduces unemployment. The country must seek to implement rigorous training and development programs, aimed at cultivating a highly skilled labor force to compete with developed nations. This highly skilled labor force, will then attract FDI, enabling employee training, tax incentives, and increased productivity. Most importantly, FDI promotes the transfer of technology, which increases competition in any given market. If Nigeria is to successfully implement these policies, the country must tackle its most pressing challenges in the form of corruption and insecurity.
Nigeria has made great strides in the past ten years by promoting strong economic growth and stability. Both of these are now under threat due to falling oil prices, which have exacerbated the country’s mismanagement of government resources as well as its poor economic diversification. As Nigeria seeks to become a part of the top twenty economies of the world, it is necessary for the Buhari government to seek financial support and guidance from the international community in the form of institutions such as the International Monetary Fund, the World Bank and the African Development Bank. If change is not enacted the once hopeful nation may be set back years, if not decades, in development progress.