Economic diversification- inevitable but pricy

It has been established by various experts that Nigeria, Africa’s largest economy with a Gross Domestic Product (GDP) of about N110 trillion has an infrastructure deficit. Although Nigeria is Africa’s largest economy but it is not the Africa’s largest government revenue earner. The policy on treasury single account may help Nigeria in terms of government revenue earnings when it is implemented faithfully by ministries, departments and agencies. What the nation does with accruable revenues determines to a large extent the success of its economic diversification agenda and good governance

Nigeria is smaller to South Africa in terms of revenue.In the year 2014, Nigeria’s revenue was about 12 % of GDP, while that of South Africa was 25.5 % of GDP.The GDP of Nigeria is based on the value of goods and services by more than 46 sectors of the economy. Only 5 out of these sectors contribute significantly to the nation’s real GDP in the first quarter of 2015. These sectors namely, agriculture contributes 19.79 %, trade (20.08 %), real estate (6.76 %), Information and Communication (11.47 %) to the government’s revenue apart from foreign exchange. Oil and gas accounts for 10.61 % of GDP, contributes about 70 % of government revenue and almost 90 % of foreign exchange earnings. While the remaining sectors of the economy including manufacturing are reported to be weak with a contribution of about 10 % to foreign exchange earnings in Nigeria.Only very few oil-rich countries have been able to diversify their economies out of the extractive sector and expand into others. Indonesia and Malaysia are countries that have diversified their economies but Nigeria has not. Nigeria’s economy will be regarded as diversified if other sectors less the oil and gas sector can account for about 90 % of its foreign exchange earnings.

It is no news that there is continued global volatility in the commodities market with the price of oil dropping to about US$ 47.58 per barrel at the time of writing this piece, while the Chinese economy is seemingly not healthy. In the face of global economic challenges, economic diversification is vital to Nigeria’s long-term economic growth.But its heavy reliance on funds accruable from the sale of crude oil coupled with infrastructure deficit amongst others will affect chances for economic growth. Studies have shown that most oil-rich nations lack clear policy guidelines on how to diversify, while policy makers have limited understanding of why diversification is imperative. That is why developed nations muster sufficient number ofeconomists who are well- grounded in political economics to work with policy makers.

Regrettably, Nigeria has an infrastructure gap worth US$ 300 billion,while the sum of US$ 15 billionwill be required annually to bring the infrastructure to a reasonable level.The budget for 2015 was N4.45 billion but the treasure was reported to be empty by PMB in June 2015.  Though the budget proposal for 2016 is not out, but a budget of aboutN6 trillion next yearwill not be sufficient to provide descent governance in order to close the huge gap in Nigeria’s infrastructure.

In order to industrialize, the nation needs power supply. The lack of adequate power supply is a major obstacle to industrializing the nation when it is expected that we transition from commodities producer to a manufacturing nation. Misaligned economic policies, weak diversification strategy coupled with weak institutions of governancehavedisabled private investors’ engagement in the manufacturing industry. From the sectorial analysis above, this writer does not concur with the theory that Nigeria’s economy is diversified becauseof government’s inability to provide infrastructure for the private sector-led industries which is responsible for their poor performance.Experience has shown that diversification of the economy with huge infrastructure gap is a challenging task and associated structural changes are usually slow to implement.

It is known that human capital development increases productivity and enhances competitiveness. Lack of highly skilled labour is a factor that will inhibit the effectiveness of diversification policies. For Nigeria that is import dependent, its challenges are compounded by the fact the dominant resource is poorly linked to the rest of the economy as a result of corruption. Why is it that economic policies such as import-substitution strategy, NEEDS, Seven- point Agenda and Transformation Agenda amongst others formulated and implemented over the years have little impact on diversification?  Is the inability of Nigeria to diversify its economy over the years due to wrong policies and incentives? Is it due to weak institutional framework to support policy implementation and monitoring? Nigeria is a victim of its own making though proliferation of policies and strategies coupled with weak leadership commitment to pull through various political agendas.

There are many abandoned projects in the country totaling about 11,886 which according to media reports will cost about N7.778 trillion to complete. It was reported that almost 34,150 kilometer federal road network in the country is in a state of disrepair. Most state government roads are equally in a horrible state. It is going to be a miracle if most states that are owing workers’ salaries are going to repair roads in the year 2016. The railway is not working optimally, while performance and effectiveness of hospitals, schools, airports, water and electricity supplies are unsatisfactory. It is true that infrastructure is a very critical component of a modern economy, but the Nigerian government cannot bridge the gap alone. This is as a result of global economic crunch which has necessitated most governments to come up with various reforms to bridge the gap in infrastructure.

A successful diversification plan requires political commitment, consistent public policies and substantial resources. For Nigeria, diversification is of fundamental importance given the evidence that it remains highly vulnerable to external shocks arising from the volatility in crude oil price in the international market. The federal government must respond to private sector needs if any inroads are to be made with respect to diversification. Economic diversification efforts in Nigeria must place emphasis on industrialization. This is because industrialization provides potential for long term growth when compared to resource-based economies. Government must also provide funds for industry relevant research and development.

The PMB government must design a workable diversification policy taking into consideration local conditions and geographic factors. Having well-functioning institutions to aid diversification process is imperative. The nation may wish to bring in private sector participation to assist in bridging the infrastructure gap. This requires critical thinking. The legislative arm of government in collaboration with the Executive may consider having an Infrastructure Development Act within the shortest possible time say 6 months. This is achievable provided all stakeholders will be involved and there will be no political interference. This is to encourageproductive and efficient export-based industries.Bridging the infrastructure gap alone will not do the economic miracle. The nation needs to further strengthen SMEs as they are important drivers of industrialization.

 

MA Johnson