The Nigerian economy and falling oil prices: SMEs, FDI as the way forward

The recent crash in global oil prices reveals a fundamental weakness in the Nigerian economy – a heavy reliance on a single source of revenue and foreign exchange earnings, oil. Following the discovery of crude oil in Oloibiri, Rivers State in 1956, the Nigerian economy has been transformed from being a major exporter of agricultural commodities such as groundnut, cocoa, rubber, timber and oil palm to becoming overly dependent on crude oil export, with petroleum export accounting for over 90per cent  of its total export earnings in 2013.

In recent years, the oil and gas sector, representing about 10.3 per cent of the country’s real Gross Domestic Product (GDP) in the first quarter of 2016 compared with 15.8 per cent in the first quarter of 2012, continues to be steadily weakened by persistent conflicts in the Niger-Delta region and falling oil prices in the international markets. The resultant effect has been a decline in GDP, with Nigeria entering “technical recession” in the first quarter of 2016. The government is, thus, faced with the immediate dilemma of how best to fund its budget, whilst simultaneously providing economic infrastructure.

A holistic multi-pronged public policy approach, which delivers short, medium and long term solutions, is needed to stimulate sustainable economic growth and development in the Nigerian Economy.

Rather than a knee-jerk reaction of increasing taxes, levies etc. to boost revenue, the first plan of action should focus on increasing efficiency in revenue collection through a restructuring of existing revenue collection and enforcement mechanisms to plug leakages and improve compliance.

There is also a need to expand the tax base by including taxable goods and services which were hitherto excluded. The government would reap maximum benefits from raising taxes and levies only after the aforementioned policy initiatives have been taken.

Trend analysis of data from the National Bureau of Statistics reveals the declining size of the oil and gas sector in national output over the last five years – its contribution to real GDP declined by 9.4 percentage points from 17.5 per cent in 2011 to 8.1 per cent in the fourth quarter of 2015. Given the recent trends, policies aimed at stimulating sustainable growth in the non-oil sector of the economy are long overdue. Thus, the most obvious solution to over-dependence on dwindling oil revenue is a diversification of the economy by encouraging private investments in other sectors such as tourism, manufacturing and agriculture.

In addition, investments in the extractive sector which promote the exploration and development of solid minerals (previously neglected in favour of oil and gas) should be encouraged. As a matter of economic policy, raw commodities in the agricultural and mining sectors must be processed locally prior to export. This will not only improve the foreign exchange earnings, but also promote job creation in the domestic economy.

The recent entry of foreign firms into the country, particularly in the retail trade sub-sector is laudable. However, a local content policy which requires foreign retailers to stock a significant amount of locally produced goods would maximise the benefits derivable from such investments, particularly in the area of employment generation. Foreign direct investment (FDI) has been used in many countries (e.g. China and Ireland- to name a few) to engender economic growth.

However, multinational corporations (MNCs) are notoriously ‘footloose’, and have been known to relocate operations when economic conditions become unfavourable in the host economy.

Therefore, a more targeted and active FDI promotion policy which details the objectives of job creation and technology acquisition – knowledge and skills transfer through linkages with domestic suppliers- should be encouraged in target industries (extractive, information and communication technology, and pharmaceutical industries). Also, policy focus should shift to attracting high-value FDI.

Providing policy support to small and medium-sized enterprises (SMEs) in areas such as financing and human capacity building will help to strengthen the linkages between MNCs and indigenous firms. It should be noted that the extent to which the host economy benefits from technology, knowledge and skill transfer from foreign firms depends largely on the capabilities of the local firms and the labour force.

Thus, a higher level of investment in education is necessary to upgrade the technological capabilities of Nigerian companies.

To this end, closer collaboration between the private sector and tertiary institutions must be facilitated.

This will not only offer the latter the necessary funding to undertake research and development projects tailored to meet industry requirements, but also ensures a better match between industry needs and the higher education sector in terms of the programmes provided by these institutions.

Several measures must be taken to stimulate private investments in the economy. These include provision of adequate infrastructure (e.g. power and multi-modal transport facilities), fostering a conducive business environment (e.g. by reducing bureaucracy associated with business registration, elimination of multiple taxation and improving security), ensuring better access to finance and stronger enforcement of property rights. Although the government’s dwindling resources poses a further challenge to public investment in infrastructure and education, public-private partnership policy should be strengthened in capital project financing.

Indeed, after decades of heavy dependence on oil revenue, the fall in oil price is a wake-up call to the Nigerian government to diversify its revenue base. Going forward, the Nigerian economy requires a paradigm shift from passive, short-term public policy strategies to a more proactive and holistic long-term approach. In summary, the following steps should be taken by the government to drive the country towards realising its potentials:

• Restructuring of revenue collection and enforcement mechanisms.
• Expansion of the tax base to enhance revenue from both direct and indirect taxes.
• Explore private-public partnerships to drive investments in education and infrastructure.
• Provide a conducive business environment and ensure better enforcement of property rights to encourage private investments in economic sectors such as tourism, manufacturing and agriculture.
• Local processing of primary commodities prior to export to improve foreign exchange earnings and create employment.
• Provide strong policy support in areas such as financing and training to build capacity in SMEs.
• Adopt a more targeted and active FDI policy approach which details the objectives, type of FDI and target industries. This maximises the benefits of attracting foreign investments to the domestic economy.
• Implement and enforce a local content policy for investors to promote the manufacture of locally produced goods.

Ipinnaiye writes from University of Limerick, Ireland