Nigeria should pursue the path of Korea and Indonesia as it seeks to wean its economy off the volatile influence of an overbearing dependence on oil exports, say economists and researchers.
South Korea and oil producer, Indonesia have made giant strides in transforming their economies by co-ordinating a wide range of policies on education, exporting, infrastructure and fiscal interventions over a sustained period of time.
A steep fall in oil prices has led to a near collapse in government revenues and foreign exchange earnings in Nigeria and the authorities have responded by imposing exchange controls that now appear to be stifling the economy, say analysts.
“The steep decline in oil prices and fall in exchange rates pose immediate challenges for foreign reserves, fiscal budgets and economic growth, while the obvious solutions such as export diversification, industrialisation and economic transformation are long-term challenges”, says Dirk Willem te Velde (PhD) of the London based Overseas Development Institute.
Nigeria’s dilemma is worsened by the approach taken by the government in seeking to apply long term strategies to deal with a short term crisis.
“The solutions being proffered are long-term solutions while the problems are short term: to diversify away from oil, to create jobs, this won’t happen overnight,” said Bismarck Rewane, frtontline economist and CEO of the Lagos-based consultancy, Financial Derivatives. “People need dollars tomorrow. They want to hear how they are going to get them and at what price.”
“People are saying the pain point is here,” said a Nigerian entrepreneur whose restaurant business depends on imported raw materials. Although he agrees that developing a local manufacturing sector is a wise policy move for one of the world’s most populous and import-dependent nations, “this can’t happen overnight.”
However, Velde says this does not mean that nothing can or should be done.
According to him, “on the contrary, this is precisely a good time for Nigeria to get stuck in the business of facilitating and expanding a modern and open manufacturing base.
“The temptation might be to create whole new manufacturing sectors behind closed borders. However, this is likely to fail. Instead, the new reality of global value chains suggests countries should aim for their companies to occupy specific niches in regional or global markets, not whole sectors.
“And this is easier to achieve, even though it still requires active collaboration between the state and business. The crucial point is that a range of carefully targeted projects now could demonstrate that Nigeria’s government is serious about jump-starting economic transformation and this is likely to pay off in the short and long term.
“After all, if a Chinese shoe factory can set up an export manufacturing operation in Ethiopia within three months (which was followed by other foreign investment), why can’t Nigeria achieve such manufacturing export successes on a larger scale and at a greater speed,” he asked.
The chief concern among the local business community and foreign investors is president Muhammadu Buhari’s strong preference to shield the naira against devaluation.
This is aligned with the president’s broader aims for the economy, namely cutting imports and tightly controlling official forex flows. The official band, adopted almost a year ago, remains at 197 to 199 per dollar.
But the de facto dual currency system suggests that devaluation is inevitable, according to economists and investors.
“Something has got to give,” said Kevin Daly, a money manager at Aberdeen Asset Management in London. “I see very little option except currency adjustment in order to provide some stimulus on the revenue side, because oil prices are doing them no favours.”