The urgent need to diversify the economy
The International Monetary Fund’s (IMF) prediction of a weak revenue generation for Nigeria should be seen as a wake-up call to diversify the economy. Therefore, the Federal Government should urgently fast-track structural reforms that will boost the non-oil sector of the economy. Sadly, the government’s diversification drive is yet to yield the expected results. This is why the timely advice to diversify the economy beyond oil revenue must be embraced. Furthermore, the government’s projections of lower revenue for the 2019 budget underscore the need for the diversification of the economy.
Currently, the ratio of government revenue to the Gross Domestic Product (GDP) remains the lowest in Africa between 2012 and 2017. According to a report by FSDH Merchant Bank Limited titled ‘Low Revenue Generation: Implications for Nigerian economy and financial market’, the declining crude oil price in the international market may place additional macroeconomic pressure on Nigeria, at least in the short term. The report is in agreement with the recent IMF’s warning to Nigeria and other sub-Saharan African economies to guard against allowing higher oil prices delay reforms. The United Nations agency argued that despite the recent recovery, oil prices may remain below the 2013 peak when prices averaged $100 per barrel.
The way forward is to look beyond oil as the main source of revenue generation and diversify the economy. The Minister of Budget and National Planning, Senator Udoma Udo Udoma, while presenting the medium-term expenditure framework and fiscal strategy paper, in Abuja, admitted that much. He noted that weak revenue generation may lead to reduction of the budget estimates for 2019 financial year. The 2018 budget is a little over N8.6trn, the highest in Nigeria’s budgeting history. One of the implications, experts say, is that the Federal Government may urgently adopt partnership arrangements with the private sector to improve infrastructure and enhance workers’ pay.
With a bleak economic outlook, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) may have limited options. It will either maintain the current policy rates and increase the yields on Nigerian Treasury Bills at the Open Market Operations (OMO), or hike the Cash Reserve Requirement (CRR) to mop up the expected liquidity in the financial market. But the fallout of any of these options may have far-reaching implications for the economy.
All things considered, the diversification of the economy remains the most viable alternative to boost the nation’s revenue base and stimulate economic growth. In other words, boosting non-oil revenues and fiscal consolidation plans remain key goal for oil exporting nations like ours. We are aware that one of the priorities of the present administration is to diversify the economy through agriculture and solid minerals development. While investment in Agriculture is already yielding appreciable results, courtesy of the CBN’s Anchor Borrowers Programme (ABB), the same cannot be said of solid minerals.
There is the need for aggressive diversification of the non-oil sector so that the government will reduce the current rate of borrowing to fund the budget. The nation’s debt profile stood at over N22.3trn as at June, 2018. The Federal Government, according to the Debt Management Office, borrowed over N2trn to fund the 2017 budget. This comprised N1.06trn from foreign sources and N1.254trn from domestic market. That of 2018 is reported to be higher than the previous year.
While borrowing to fund development projects is not bad, we advise that government should not toy with diversification. We also believe that the current effort to expand the tax net will rejuvenate the economy. Without doubt, the overdependence on oil revenue is fraught with risks.
Therefore, we call for a transparent disbursement of the recent CBN N500bn Non-oil Export Stimulation Facility (NESF). The loan, which is administered by the Nigerian Export-Import Bank (NEXIM) to local businesses and stakeholders in the non-oil sector, attracts a single digit interest rate of between 5 and 9 percent.
Since diversification is the way to go for the economy, the government should embrace the Public Private Partnership (PPP) model, which can make the non-oil sector generate the much-needed revenue.