Nigeria: Growth on the Back of High Commodity Prices - How Sustainable?

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Monday, July 8, 2013 / DLM Research

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Huge structural imbalances exist against the backdrop of the Nigerian economy’s over-reliance on oil. The dependence of the economy on a single resource has led to the neglect of other sectors which were key drivers of the economy in the 1950s-60s, in particular the agricultural and solid minerals sector. Today, crude oil is the lifeblood of the Nigerian economy as it is a major source of government revenue and foreign exchange. Presently, revenue from crude oil export accounts for over 80 percent of government revenue and about 90 percent of foreign exchange earnings.



Oil revenues remain the primary source of funding for annual national budgets. The annual national budgets rely primarily on revenues generated from the oil sector as it is largely underpinned by projected oil production levels and benchmark price assumptions. In the event that oil revenue assumptions are not met, higher fiscal deficits arise which would have to be financed by selling domestic bonds which would definitely crowd out private investments or the external debt option becomes the only available avenue that the government can explore in a case where macroeconomic stability will be affected by printing more money. As a result, we believe that the need for Nigeria to successfully develop its non-oil sector and generate revenues from alternative sources cannot be over emphasised in view of the country's vulnerability to future oil shocks.

 

We are of the opinion that Nigeria is yet to fully leverage on the vast wealth in fossil fuels to facilitate stronger growth and an improved standard of living. Poverty incidence was reported at about 70 percent in 2010 which shows that oil gains has neither effectively impacted on the level of poverty nor supported employment creation even as unemployment rate stood at 23.9 percent in 2011.



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