(Bloomberg Opinion) — Third in a four-part series on oil-dependent economies and their transition to a zero-carbon future. Read part one on Saudi Arabia here and part two on Russia here. Part four, on Canada, will be published tomorrow.
Oil can be both a blessing and a curse. In Nigeria, it has mostly been the latter.
Just a decade after crude was first discovered in 1957, it was already tearing apart the young country in civil war. Production has never far exceeded the 2.3 million barrels a day hit in 1979, and won’t in the foreseeable future. Nigeria’s oil output was insufficient to spark a Middle Eastern-style economic miracle back then; now, with a population three times larger, it’s woefully inadequate.
Imagine a Nigeria where oil had never been discovered, and it’s not clear its economic picture would be any worse now. Ghana and Cote d’Ivoire, neighbors less blessed with oil wealth, have been pulling ahead in terms of per-capita gross domestic product in recent years. Adjusted for inflation, that measure of income hasn’t grown in Nigeria since 2014. China, India and Vietnam were all poorer than Nigeria as recently as the 1990s. They’re now considerably richer.
Oil has held back the country in multiple ways. Overseas purchases of Nigerian crude, underpinned by a quasi-currency peg, push up the value of the naira to levels at which other industries struggle to compete. The currency has been devalued three times over the past year and was still overvalued by about 18%, the International Monetary Fund said in February before the latest cut.
Private businesses struggle to hire qualified workers. More than half of wage-paying jobs are in the public sector, which has traditionally derived as much as 80% of its revenue from crude. Educated Nigerians would often prefer to be unemployed and “queueing” for a secure government job rather than working in the private sector, according to a 2015 World Bank report. Many more seek education and jobs abroad, contributing to a brain drain that’s created a diaspora of 17 million people, equivalent to about one-twelfth of the in-country population.
The gusher of oil money also fuels the corruption and unrest that has long plagued the country. Some $380 billion has been stolen or wasted since independence, according to one 2006 estimate by the former head of the country’s anti-corruption agency. Roughly 15% of oil production is stolen in so-called “bunkering” operations, creating an illegal industry so large and tolerated that it’s a more or less accepted feature of the landscape. A low-level insurgency in the Niger Delta oil-producing region has been going on since the mid-2000s. In Transparency International’s Corruption Perceptions Index, Nigeria comes at 149 out of 180 countries.
All this has stunted swathes of the economy.
The manufacturing sector, which added $39 billion of value in 1981, edged up to just $43 billion in the four decades to 2019, according to the World Bank. South Korea’s grew 16-fold over the same period, from $24 billion to $397 billion. Agriculture still accounts for nearly a quarter of the economy, well above most other large emerging markets.
Despite a burgeoning labor force that will contribute as many as one in every three new working-age people worldwide by the middle of this century, jobs are scarce and unemployment high. The share of the working-age population in work actually fell between 2000 and 2019 to 51% from 58%, one of the sharpest drops anywhere. Some 93% of employment is in the informal sector, and growth in non-oil GDP consistently trails the oil industry.
Still, oil itself will struggle as demand starts to decline in the years ahead. Nigeria’s production costs of around $30 a barrel are substantially higher than in the Middle East, pumped up by the same corruption and overvaluation that plagues the rest of the economy. Its crude, traditionally attractive due to its high yields of gasoline, may find life particularly hard over the coming decades as electric cars cause that segment of the barrel to decline fastest.
All that sounds grim — but there’s reasons for hope.
Consider another large, populous tropical oil exporter riven by corruption and regional tensions — Indonesia, five decades ago. Oil rents, which made up a Nigerian-sized slice of the economy in the 1970s, have since slumped to almost negligible levels, turning the country into a net importer of crude.
That doesn’t appear to have done any harm. Quite the opposite: Growth in per-capita GDP has been higher and far more stable, and now runs at twice Nigeria’s level. Thanks in part to the far higher share of the population in jobs, extreme poverty has also slumped to just 3.6% of the population, compared with 39% in Nigeria.
How could sub-Saharan Africa’s largest economy trace a similar path?
One solution is likely to be imposed on it by default: Decrease its dependence on oil. Indonesia’s production has fallen by about half since the 1990s — but thanks to Nigeria’s headlong population growth, there are now even fewer barrels per person coming out of the ground there than in its Asian counterpart. The government in Abuja’s dependence on oil revenues has collapsed since crude prices slumped in 2014, with the majority of state revenues coming from non-oil sources in 2015 for the first time since 1971.
Demographics ought to provide more wind at Nigeria’s back. One in eight people joining the global working-age population over the next 30 years will be in Nigeria. That gives the country the potential for a Chinese-style boom in labor-intensive work, if only it can create the jobs. Nigeria is home to the world’s fourth-largest population of English-speakers, and has strong connections to an often affluent diaspora in the U.S. and U.K. Literacy is still far too low, but Nigeria’s education index — a measure of the average time spent in school — is higher now than China’s was in 2001.
Manufacturing, a sector essential to economic development that shrank to just 6.6% of the economy in 2010, has showed some surprising potential of late, too. Dangote Group, founded by Africa’s richest man Aliko Dangote, has built one of the world’s biggest cement plants southwest of the capital Abuja, and one of its largest sugar refineries in Lagos. Its planned oil refinery on the other side of Lagos, also among the world’s largest, is due to open this year.
Renewable power may even turn energy from a handicap to an advantage. Nigeria’s grid power is notoriously bad, with most of the industrial, commercial and residential sector depending on costly diesel generators to keep the lights on at five to seven times the cost of grid electricity. Solar panels backed up with batteries and small hydroelectric dams already provide cheaper off-grid generation.
As renewables costs fall, the government has promised to connect 25 million people by adding photovoltaic power to 5 million more homes. Nigeria’s solar power potential, according to the World Bank, is similar to that of India, home to the world’s fifth-largest photovoltaic generation fleet.
Making the most of those advantages in a country that has been wedded to oil since its inception isn’t going to be easy. Oil has simultaneously sustained and undermined Nigeria since independence. Breaking that will be hard, especially as current elevated prices reduce pressure for the sorts of hard economic reforms implemented since prices collapsed in 2014. If it succeeds, though, ending Nigeria’s oil addiction may be the first step towards achieving its potential.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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