What should FG do to insulate economy from oil price volatility?

 Dr. Alimi Abdul-Razaq (Energy Law expert and Managing Partner, House of Laws Legal Practitioners and Arbitrators)

If we look at the ways other countries have approached the issue practically, they may be a guide. In Russia, Saudi Arabia, Venezuela, and Angola, they all experienced oil price volatility, but they all reacted to it differently. Saudi Arabia had over $900bn of foreign exchange reserves, which appear an adequate buffer to fund their budget. However, they reduced subsidies and increased tax and now they are in the process of selling a significant stake in the Saudi government-owned oil corporation called Aramco, through an initial public offer. These actions were all taken in reaction to the reduction in crude oil price and to enable them to fund their development plans.

Russia on the other hand, did not have as much foreign exchange reserves. They had about half of that of Saudi Arabia, but in response to the oil price volatility, they freed the market and did not use any control to stem their currency. By so doing, they opened their markets. This in turn increased direct foreign investment, which they used to buffer the oil price volatility.

Nigeria, Venezuela and Angola are all in the same boat, in that they have comparably lower foreign exchange reserves and they put in currency controls to tighten the market. This naturally deterred foreign investments and of course, they are witnessing relative increase in inflation and devaluation in currency.

In this circumstance, therefore, Nigeria will have to ensure greater efficiencies in tax revenue collection as well as consider opening up the market. We also may look at hedging oil production and locking oil sales into long term contracts at fixed prices.

The benefit of this is that you have guaranteed revenue streams at a particular price. So, if oil prices reduce, then they wouldn’t affect the country. But if oil prices increase, then you don’t benefit from the upside.

• Mr. Rislanudeen Mohammed (Managing Director, Safmur Investments Ltd)

We need to focus on policies that support backward and forward integration and seek to make agriculture as a business, rather than just for self sufficiency. Recapitalising Bank of Agriculture, as well as US$1.3bn anticipated offshore investment to support the proposed Development Bank of Nigeria, are areas that need to be fast-tracked in 2017. This will ensure a single digit interest rate funding for agriculture and agro-allied business. This will help in increasing the Gross Domestic Product growth rate, reduce foreign exchange pressure for imports, as well as minimise the impact of imported food inflation in our economy.

The National Bureau of Statistics data has shown that the contribution of agriculture to nominal GDP, for example, has grown higher than it was. This is positive and assuring, as there is now ownership.  This, however, needs to be complemented by walking the talk in ensuring the 2017 budget fiscal stimulus is implemented as much as possible. There is potential for growth in non-oil exports. In virtually all the states of the federation, we have one form of economic competitive advantage or the other.

• Mrs. Aminat Adewale (Ibadan-based educationist)

There are many things that the Federal Government can do to insulate the economy from the oil price volatility. In fact, it has already taken some steps which are already helping the nation in this period of economic recession. Nigeria is a blessed country with abundant resources that if well harnessed, can get us out of economic doldrums. One is agriculture. There is no nation that can survive when its people are hungry. The Federal Government should also tap into the mineral resources and sustain its tax regime. People evading tax should be sanctioned appropriately to serve as a deterrent to others.

• Dr Anthony Aziegbemi (Economist/a former member of the House of Representatives)

With all the income that we have earned in all the booms that came with oil, we still remain at a low level of technology and seemingly unable to move up the productivity chain in agriculture, which is the least we could do as a country.

The 2017 budget allocation to agriculture of N92bn is in absolute terms the highest ever. There is no doubt that if effectively utilised, it will help in accelerating the growth of the sector and consequent diversification of the Nigerian economy away from oil.

So far and beyond the efforts by the government, the closure of leakages and sources of corrupt bleeding of the economy has inadvertently pushed many to agriculture.

Production levels have equally improved. What somehow appears to be lacking in the strategy of government is a deliberate set of actions to also sustain some level of subsistence agriculture to deal fatal blows on poverty and hunger among low-income earners.

While commercial farming without doubt helps in this regards over the medium to long term, it cannot replace the need for farming for subsistence among the poor in the short term.

• Bisi Sanda (Economic analyst/retired Senior Partner, Ernst and Young)

The economic situation in Nigeria now is most unfortunate and it is the fault of successive governments in the country since the 1970s. If you review the literature available on the Nigerian economic history, this fault is confirmed with vivid evidences. On the talk about restructuring, the fact about us is that we are still a commodity-based economy.

But modern economies now consume a lot of manufactures. In other words, they consume commodities that have been transformed through value-added activities.

Volatility will always occur, not only for oil, but for all commodities and manufactures. But we don’t have to put all our eggs in one basket. The problem of volatility is just starting. About five years ago, the oil volatility was predicted.

Several factors have brought about the volatility as most developed economies have moved away from fossil fuel-based activities to using clean energy. They are trying to avoid gas products and embrace solar energy. Our predicament is just beginning and our leaders – the executive and the legislature – are not responding to these international economic changes. Nigeria should not just move away from a mono-economic base, we must realise that there is no future for oil and gas again in international markets. Just two weeks ago, it was in the global press that Volvo announced that its vehicles would be electricity-based from 2019. We should remember that the automobile industry alone account for about 50 per cent of the consumption of petroleum products. So, where is the future of oil and gas if the automobile sector embraces electricity and solar? Nigeria should realise that oil is not as competitive as it used to be. There is no quick fix to this problem. We must start a gradual process of diversification.

• Dr Samuel Nzekwe (A former President, Association of National Accountants of Nigeria)

Oil price volatility will, of course, impact negatively on our economic activities because crude oil is the mainstay of the Nigerian economy. This is why the government must now look inward to get money, which is part of what it is currently doing through taxation by using the Federal Inland Revenue Service.

Also, you will agree that in recent times, we’ve been hearing about yam export from Nigeria, which is geared towards being able to earn more foreign exchange. What I think we should do now is to further look inward on how to generate more funds internally and also to see how to export more of our products, both raw and manufactured goods. This is one way to revive the economy. If we don’t do this, at the end of the day we will find ourselves in a very big mess.

It is also important to note that there is the need for an enabling environment to allow businesses to thrive. The manufacturing sector of the economy must be allowed to thrive. We must look at what to do in order to start importing less and produce more of what we consume in Nigeria. If we do that, even if there is a reduction in our supply of oil or volatility in price, it will not adversely affect our economic well-being as will be the case if we don’t. But because virtually all we use in Nigeria today are imported, we spend the limited foreign exchange we have on these imported items, thus depleting our reserves. If we have food security, manufacturers are producing more than 70 per cent of what we need in Nigeria and we export more than we import, then there will be less cause for worry.

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What should FG do to insulate economy from oil price volatility?

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