Nigeria’s efforts to diversify its economy and reduce dependency on oil exports are being held back by long-standing difficulties in obtaining financing, according to a central bank official.
Despite concerns Nigeria’s oil reserves will run out within decades, and against a backdrop of international pressure to cut carbon emissions and invest in renewable energy sources, World Bank data shows fuel – mostly crude oil – accounted for 94% of the country’s exports in 2018.
“This over-dependence on oil exports has therefore exposed the economy to external shocks,” said Richard Audu Maikai, principal manager of the Central Bank of Nigeria’s (CBN) trade and exchange department, speaking at last week’s GTR West Africa conference in Lagos. “This situation must not be allowed to continue.”
Maikai added that the lopsided nature of Nigeria’s economy means potential volatility around oil prices poses a major threat to its resilience.
Though fuel exports totalled US$58.7bn in value in 2018, the figure two years previously – when oil exporting countries were grappling with the effects of a global crash in oil prices – was little more than half that.
The concern is not necessarily an immediate return to those days, with prices currently expected to rise further.
Razia Khan, Standard Chartered’s chief economist and managing director for Africa and the Middle East, believes underinvestment worldwide in new supply should eventually result in “a squeeze in global markets which is going to send oil prices higher”, as demand continues to grow.
“This will be good news for economies that produce oil, economies like Nigeria, but the real question for the Nigerian economy is: can it move away from this basic oil dependency?” said Khan, speaking at the same event.
In the longer term, the clock is ticking for Africa’s largest economy. President Muhammadu Buhari said in 2017 that Nigeria’s oil reserves were expected to dry up within 25-30 years, although the government’s Department of Petroleum Resources has given a more conservative estimate of 50 years.
For Khan, the answer is a “sustained emphasis on the structural reforms that are still so desperately needed in Nigeria”.
The central bank has already set ambitious targets for diversifying its economy. It hopes non-oil exports such as cocoa beans, wood and seeds, will be worth US$12bn by 2024, up from US$3.7bn two years ago. In a rallying cry to financial institutions Maikai said every effort aimed at supplying the economy on a sustainable basis would be encouraged and supported.
“The reasons for slow growth and development of the non-oil sector are largely attributed to poor infrastructure, inadequate power supply, lack of human and productive capacity, as well as adequate finance,” he said. “While finance is not only the major constraint of the growth of the non-oil sector, the absence of a sustained financing mechanism has greatly undermined this sector.”
Nevertheless Maikai acknowledged that the country’s non-oil sector “is a little bit complicated”.
He explained that some commodities suffer due to uncompetitive tariff rates, such as 10% levies “which other neighbouring countries in West Africa are not charged”.
Smuggling is another problem. Concerns over the illegal trafficking of fuel and agriculture contributed to the government’s decision to close its borders with Benin and Niger, and though officials from the three countries have since agreed a joint strategy on stopping smuggling, efforts to persuade Nigeria to reopen its borders have so far proved unsuccessful.
What’s more, Maikai said exports are often rejected once they have left the country. He gave a recent example of China rejecting 30 containers of Nigerian cassava, on the grounds that the moisture content was not acceptable. He attributes that to poor infrastructure, as laboratories in Nigeria were unable to carry out the relevant tests before shipping.
Legal reforms back on the agenda
At the same time, signs of progress from within the oil sector could make the sector more appealing to financiers in the immediate term.
The introduction of a comprehensive Petroleum Industry Bill (PIB) has dogged successive Nigerian governments for nearly two decades, creating a highly unstable legal environment for financial institutions. A previous version of the bill passed through parliament in January 2018, but collapsed in June after President Buhari refused to sign the text into Nigerian law due to concerns around the potential loss of ministerial power and a lack of “fiscal content”.
However, Minister of Petroleum Timipre Sylva announced on Monday that a new bill would be sent to parliament next week, with the intention that it becomes law by mid-2020.
Sylva acknowledged the delays have brought “a lot of uncertainty to the investment climate” and insisted ministers were now “on the same page” as the National Assembly.
Legal reforms would not necessarily be a panacea for the oil sector. Generally, capital allocation to the oil and gas industry is becoming increasingly stretched, according to Simon Blaydes, country head for Nigeria at Vitol. He said waning appetite for investment in fossil fuels means it is becoming “more and more tricky to be adventurous”.
“Putting equity money rather than debt to finance exploration and production is something that’s not on our agenda now and not for the foreseeable [future],” he said.
That said, Blaydes believes large-value investment will still happen if the terms of business are sufficiently attractive, and the prospect of progress with the PIB would be a major boost to Nigeria’s prospects.
“Get the legislation passed and we’ve got a stable environment,” he said. “Keeping everyone hanging on is not good for the immediate future.”