Tough economic time lie ahead for Nigeria in 2015 and beyond due primarily to the mono product economy which constitutes more than 70 percent of Nigeria revenue and 90 percent of foreign earning.
Mono Product Economy of Nigeria has always been a ticking time bomb waiting to explode anytime, but the byproduct of excessive dependency on oil to power Nigeria economy was not expected to manifest so soon. Most Nigerians knew that the oil well will eventually run dry, but they expected it to happen in 30 or more years.
Nigeria government is so dependent on oil revenue that their annual budget is usually formulated on the expected price of crude oil. Oil prices skyrocketed to over $100 per barrel in the past couple of years, which resulted in an increase in recurrent and capital expenditures by the federal, state and local governments. The dramatic drop in oil prices is scary for a country like Nigeria. 2015 federal budget was initially set at the bench- mark of $78 per barrel and was later reduced to $65 per barrel. Nigeria government has estimated that this reversal in oil fortune will reduce 2015 economic growth from 6.35 to 5.5 percent.
Furthermore, the federal government wants to cover 2015 budget shortfall in oil revenue by raising revenue through new tax measures that will include import duty surcharges especially on luxury goods. Import duty surcharges will surely help in forestalling depletion of the country’s foreign reserve.
The problem for Nigeria is that lower oil prices is likely to persists for years to come due to new technologies and alternative oil discovery such as shale oil, horizontal drilling and hydraulic fracturing known as fracking. Renewable energy such as solar will further depress oil demand.
Nigeria was one of the top –5 oil supplier to the United States. In February 2006, US imported 1.3 million barrel of oil per day from Nigeria. By 2012, import from Nigeria dropped to 0.5 million barrel per day. Early this year, 2014, Nigeria export to US based refineries dropped further to dismal 100,000 barrel per day and stopped completely in July 2014, a record low since 1973 when US started importing oil from Nigeria. This trend is likely to continue. United States continues to import oil from other countries such as Saudi Arabia and Kuwait because they produce lower quality crude, which is cheaper unlike high quality and more expensive crude from Nigeria. United states may eventually become self-sufficient in oil production and will likely discontinue all oil import in no distant future. Major oil companies around the world are curtailing new oil exploration because it is no longer as profitable as before.
Meanwhile, oil prices have swung from 52 week high of $101.33 to $58.42 per barrel as of 12/19/14. So Nigeria is already off $6.58 per barrel in deficit as of 12/19/14, and the gap may widen over time. What is happening in the oil market now is very significant because oil prices use to drop during worldwide economic slow down or recession but that is not quite the case right now.
The future of mono-product economies like that of Nigeria is bleak. It is comforting to hear Nigeria central bank governor, Godwin Emefiele acknowledge that the downward trend in oil price is likely to persist. Acknowledging a problem is the first step in exploring meaningful solutions. Long-term solution for the upcoming economic meltdown is total diversification of Nigeria economy. Current privatization of major government owned industries such as NITEL, power, cell phone and other utilities are the right first step, but manufacturing and revitalization of agriculture is the way forward. Nigerian companies must delve into manufacturing of goods and services, and the government has to make it easier for them to get low interest loans. Diversification through manufacturing like China, South Korea and other emerging economies is the only way forward. Nigeria needs to impose import duties on good and services in-order to protect local manufacturers, which will in turn reduce dependency in foreign import. Nigeria has achieved near self-sufficiency in movies and banking which can be replicated in other sectors of the economy. Nigeria should henceforth assume that the era of oil dependency is a thing of the past.