Oil Has Stained Nigerian Economy, Grey!

by L.Chinedu Arizona-Ogwu

Nigeria’s failure to diversify its economy has devalued the citizens from enjoying better democratic dividend and weakens their small and insular private sector. Few local entrepreneurs have drawn on the international market in ways producers in some other developing countries. At less than 1 per cent, the share of manufacturing in Nigeria’s exports is minuscule. Most industries are struggling to survive, with capacity utilization in manufacturing down from 64 per cent in December 2007 to about 98 per cent in the first half of 2008. Industries using local inputs, such as breweries, cement, soap and textiles, tend to perform better than those highly dependent on imports, like radio and vehicle assembly. But the manufacturing sector as a whole has been in decline in recent years, marked by an average growth rate in 2003-07 of minus 10.2 per cent.

According to Nigeria’s Federal Office of Statistics, the national unemployment rate rose from an average of 10.9 per cent in 2005 to an estimated 54.5 per cent at end of 2008. However, these figures grossly understate the slack in the labour market in a country where there are few, if any, incentives for jobless people to register with the authorities. With a workforce estimated at 800,000, Nigeria’s bloated public sector is in no position to accommodate more workers. With hundreds of small companies forced to close in recent years by the deterioration in economic conditions, especially inadequate credit, rising production costs and diminishing consumer demand, the capacity of the economy to provide full-time employment has diminished. One vital challenge facing the new government, therefore, will be to stimulate new businesses and support the development of the many small enterprises that exist in the informal sector, which accounts for most employment but lacks capital investment.

It is difficult to estimate the size of Nigeria’s informal sector, since virtually all of its activities are unrecorded, but a walk through the streets of any Nigerian city reveals people busy scratching a livelihood from micro- and small-scale enterprises. The apparent resilience of this sector, which provides a wide range of services and goods for the poor and the pauperized middle classes, sharply contrasts with the fragility of the formal sector. According to the International Labour Organization, small- and medium-scale enterprises and particularly informal sector undertakings account for over 60 per cent of economic activities in Nigeria and over 35 per cent of urban employment.

In addition to technical and other forms of assistance, such businesses will need access to appropriate sources of credit. Though interest rates have stabilized in recent years, with lending rates ranging between 18 and 21 per cent in 1998, many banks are still reluctant to extend credit to small- and medium-scale producers and prefer to lend to big businesses and engage in foreign-exchange related transactions. The Central Bank of Nigeria has said that the large spread between bank deposits and average lending rates has discouraged savings and borrowing to the detriment of the economy. Moreover, few banks operate in the rural areas, with most concentrating their activities in Lagos and other urban centres. In 1997, three-quarters of the 2,472 branches of commercial and merchant banks in Nigeria were in the cities and towns. Community banks operate throughout the country, but many of these small institutions — set up under licence from the government to provide limited financial services to the rural poor — have run into trouble recently, with 353 losing their licences in 1997, bringing the total number of community banks down to 1,015.

If everyone on Earth were to consume petroleum at the per capita rate of industrialized countries, it would require a fivefold increase in current oil production to meet the demand. If, by 2060, the world’s population reaches the expected 11 billion mark and all were to consume as much energy as the average Australian does now, annual worldwide oil production would need to be increased about 30 times.

By the year 2060, if the world maintained a mere 3 percent annual economic growth rate and the entire world’s people were to benefit equally, world economic output would have to increase to 80 times its current rate. These limits-to-growth themes have been debated in academic circles for more than 30 years, but they almost never appear in the mass media. What kind of labour can contribute to increasing Nigeria’s wealth? Activities which do not produce a vendible commodity can be reactivated at a profit. Right now, Nigerian government should regard human labour as the mainspring of wealth; and the economical use of labour as highly important.

Within Nigerian enterprise circuit, for example, there are many tasks which had to be performed, such as cleaning, record and bookkeeping or repairs, which did not directly contribute to producing and increasing wealth. There were also whole occupations such as domestic servants, soldiers, schoolteachers etc. which, although necessary, did not seem “productive” in the sense of increasing the material wealth of a society. Part of Nigerian population consumed wealth but did not create it. To maximize economic growth, therefore, “unproductive costs” which consumed part of the total national income rather than adding to it should be minimized; productive labour had to be maximized.

By the euphoria of the 1974 oil price boom, the Ministry of Economic Development approved and added numerous projects for other ministries not supported by a proper appraisal of technical feasibility, costs and benefits, or the technical and administrative arrangements required to establish and operate the projects. According to Sayre P. Schatz, who advised the Ministry of Transport while it prepared feasibility studies for the plan in 1974,”Economic reasoning gave way before economic enthusiasm,” and the necessary coordination and implementation were ignored.

Inflationary minimum wage and administrative salary increases after October 1974, in combination with the slowing of the economy, made budget shortfalls inevitable. In June 1975, several state and local governments did not receive their monthly subsidies from the federal government. Just before the July 29, 1975, coup in which head of state General Yakubu Gowon was toppled, government workers in several areas threatened to impair vital services unless their June wages were paid.

In March 1976, in response to an economy overheated by demands for new programs and higher wages, General Olusegun Obasanjo, then head of state, pointed out that petroleum revenue was not a cure-all. Many projects had to be postponed, scaled down, or canceled when oil-revenue-based projections made in 1974-75 later proved too optimistic. Projects tended to be retained for political reasons, not because they were considered socially or economically useful by the Central Planning Office of the Supreme Military Council.

The civilian government that tacks office on October 1, 1979, postponed the beginning of the fourth plan (1981-85) for nine months. Whereas the plan’s guidelines indicated that local governments were to be involved in planning and execution, such involvement was not feasible because local governments lacked the staff and expertise to accept this responsibility. The plan was also threatened by falling oil revenues and an increased need for imported food that had resulted from delays in agricultural modernization. Projected to rise 12.1 percent annually, exports actually fell 5.9 percent yearly during the plan, as a recession among the nations of the Organisation for Economic Co-operation and Development reduced demand for Third World imports. As exports declined, the capacity to import construction materials and related capital goods also fell, reducing growth in the construction, transport, communications, utilities, and housing sectors.

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1 comment

bemnyax@yahoo.com March 2, 2009 - 2:24 pm

This is a well written piece-analytic and educative. However, “Economists argue that oil scarcity will result in price increases, making it more profitable to access poorer deposits” True.

“Beyond that point, the energy required to find and extract a barrel of oil will exceed the energy contained in the barrel.” True

There is reason to believe that the oil industry is well aware of oil field depletion. No new supertankers have been built for 20 years, while interest in squeezing oil from shale deposits seems to be growing. What, then, is the solution to our acute energy problem? There isn’t one.” – I beg to differ. There is a potential solution, renewables. Some argue this will not replace, yes, they will not, but they will complement fossil based energy. More importantly, there are potentials in Biomass, especially in Africa were there exists a huge potential. Gasification, Pyrolysis and Fischer-Tropsch technologies have a huge potential. So lets keep our fingers crossed.


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