CONTENTS 1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 Oil Dependent Economy 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Reading
1.0 INTRODUCTION
Nigeria has been a largely agrarian economy prior to the discovery of crude oil in 1956. Since she began to explore oil in 1958, there has been gradual abandonment of other sources of foreign exchange earnings and more concentration on petro-dollar. This unit examines the implications
2.0 OBJECTIVES
By the end of this unit, you will be able to:
explain Nigeria’s slide to oil dependent economy
discussthe implications of oil dependence on Nigeria’s economy.
3.0 MAIN CONTENT
3.1 Oil Dependent Economy
Nigeria has over the years survived majorly by the exploration and exporting of crude oil. Wealth generated from crude oil has been responsible for virtually everything in Nigeria, ranging from politics, the debate on resource allocation and manipulation of primordial sentiments, leading to a myriad of challenges that have made the formation of national identity elusive. Policy direction also had been motivated by the avalanche of crude oil. The overdependence of Nigeria on the income generated by this natural resource has not solved the numerous problems that have bedeviled the country. Among those challenges are insecurity, terrorism, inequality, tribalism, deprivation and poor policy making strategies among others.
Nigeria’s predicament began with the OPEC crisis of the early 1970s, which led to significant changes in the world oil market as the price of crude oil skyrocketed from $3 per barrel to $12 per barrel in 1974. In the wake of the oil boom, the Iranian revolution of 1979, and subsequently the Iraq-Iran war that began in 1980 both contributed in further increasing the price of crude oil from a $14 per barrel in 1979 to $35 per barrel in 1981 (Shaibu, 2017).
The continual dependence of the Nigerian government on oil resources as a source of foreign exchange earnings to the detriment of agriculture has historically impacted negatively on the country’s economy. That is while the collapse of oil prices in 1986 produced severe consequence such as a shift in the global economy that triggered a crash of the stock market, soaring inflation, and high unemployment rate in Nigeria. By implication the dependence on oil revenue to finance national development has made the Nigerian economy highly susceptible to oil price volatility.
Resource dependent societies hardly achieve tangible development. In Nigeria for instance, resource abundance has been seen as a curse as it has plunged the country into poverty instead of prosperity, underdevelopment instead of development, and insecurity instead of security (Ibeanu, 2008; Omeje, 2006). Continual agitations for resource control and the question of ownership will continue to plague the Nigerian state. There are no evidences of any significant improvement in the quality of life of Nigerians.
To this end, Acosta and de Renzio (2008) state that rent dependent countries have a high tendency to mismanage the economy. This explains the volume of recklessness and mismanagement of public funds through embezzlement, bribery and extra-budgetary spending in Nigeria.
Following the decline in oil revenues in 2015, the Nigerian government was forced to seek economic diversification and has identified agriculture as one of its key goals to help address the country’s dependence on food imports. Greater volatility and uncertainty is manifested in the massive fall of oil prices following the corona virus (Covid 19) pandemic that has ravaged the entire world. Some of the consequences of volatility in crude oil prices on Nigeria and many other resource dependent economies according to Shaibu (2017) are;
Fall in Government Revenue
As the price of the commodity dropped Nigeria’s federally-collected revenue plunged showing the country’s perennial vulnerability.
Balance of Trade Negative-bound
Nigeria’s balance of trade has mostly been in positive territory, as the country makes more money from crude oil sales than it spends on imports for goods and services. Any reduction in oil prices however pushes Nigeria to a negative balance.
Increase in Debt Profile
Whenever revenues dip suddenly, Nigeria has either taken from its savings or expanded debt with great audacity. Following the fall of the prices of crude oil as a result of the Covid 19 pandemic, Nigeria’s internal and external debts have skyrocketed.
This is because, the country has to rely on borrowing to finance the budget deficit.
Currency takes a hit
Wherever oil goes, the worth of Nigeria’s currency s always follow; the Naira will often immediately lose its value against the Dollar, in times of uncertainty. Since foreign exchange receipts from oil are responsible for 90% of export earnings, it is impossible for Nigeria to keep a strong currency, considering that its imports bill remains sizeable.
Capital Expenditure in Crisis
When oil prices crash, capital expenditure becomes an obstruction of sorts to development, because recurrent expenditure is made somewhat sacrosanct via legislation.
Sub-National Government fail
Virtually all the states in Nigeria are dependent on federal allocation to carry out any project and even pay salaries of their workers. So, a fall of price of crude oil is an automatic failure of these states to meet their obligations. When Nigeria slides into recession in 2015, many states could not pay their workers. A worse scenario is expected with the ravaging of the Covid 19 Pandemic as price of crude oil in the international continued to fall prompting the downward adjustment of Nigeria’s national budget for the year 2020.
The way out of this is the diversification of the economy away from crude oil. The agricultural sector, solid minerals and other non–oil sectors of the economy must be pursued by the Nigerian government. This is the way out of the shocks of oil volatility.
SELF-ASSESSMENT EXERCISE
Which of the following has been the mainstay of Nigerian post – independent economy? (a) Solid minerals (b) Agriculture (c) Information and Communication Technology (d) Crude oil
4.0 CONCLUSION
This unit examined the implication of oil dependence for the survival of the Nigerian economy. Nigeria has been a victim of oil price volatility.
Survival and sustenance of the Nigerian economy is predicated on the capacity of the Nigerian government to pursue aggressive diversification.
5.0 SUMMARY
Nigeria discovered oil in 1956 in Oloibiri in present day Bayelsa state and began exploration in 1958. After over six decades of oil exploration, Nigeria has consistently been a victim of oil price shocks and volatility.
Resources of the country have been consistently mismanaged. To avoid such mismanagement, corruption and other economic crises of this system, the Nigerian government must urgently diversify the economy away from crude oil dependence.
6.0 TUTOR-MARKED ASSIGNMENT
1. Which of the following is not a consequence of oil price
volatility? (a) Fall in Government Revenue (b) Balance of Trade Negative-bound (c) Increase in Debt Profile (d) Positive image of Nigeria abroad
2. What can the Nigerian government do to drive the country away from oil dependency? (a) Devaluation of country’s currency (b) Trade liberalisation (c) Political freedom (d) Diversification of the economy
7.0 REFERENCES/FURTHER READING
Acosta, A. M., & de Renzio, P. (2008).Aid, rent and the politics of the budget process. Sussex: Institute of Development Studies.
Ibeanu, O. (2008). Affluence and Affliction: The Niger Delta as a Critique of Political Science in Nigeria. Nsukka: University of Nigeria, Nsukka.
Omeje, K. (2006). High stakes and stakeholders: oil and security in Nigeria. England: Ashgate Publishing Limited.
Peter, M. A. and Ocheni, M. (2015).Beyond resource endowment: The state and the challenges of national security in Nigeria, 1999 To 2014. Journal of Third World Studies 32.1 (Spring 2015), 293-313.
Shaibu, E. M. (2017). Economic Diversification and the Challenges of Sustainable Development in Nigeria: A Focus on New Opportunities. Journal of Research and Development in Arts and Social Sciences (JDRASS), 1 (2).