With a raging pandemic still going on, millions of consumers around the world are appreciating lower prices at the gas pump. However, for many countries such as Nigeria that greatly rely on revenue from the production and sale of oil, the results are devastating to their economy.
Nigeria officially went into recession in October 2020,making it the second one they’ve experienced in five years. Oil production is government owned, and earnings from exports comprise 70 percent of all government revenue. Sales are denominated in U.S dollars and account for more than 90 percent of the country’s foreign exchange.
In December 2019, oil sold for $60 per barrel, but one year later it only sells for $48 per barrel. In April 2020 the price had plunged to $18 per barrel, and for a time it was actually sold at a loss due to a lack of storage capacity. With daily production output usually at 2 million barrels per day, it has now been cut to 1.4 million barrels per day.
This is happening right when the Nigerian government is faced with the costs of responding to the coronavirus and stimulating the economy, requiring both revenue and foreign exchange.
Why has the price of oil decreased so rapidly?
The main reason for the price decline for oil is the sharp decrease in demand due to the worldwide coronavirus pandemic. With many businesses shut down, tourism is practically nonexistent, and with many people working from home, the need for oil in transportation worldwide has significantly declined.
Additionally, a trade war between Saudi Arabia and Russia erupted over oil production levels just as the effects of the pandemic started to take hold. This destabilized the entire market and affected the world price of oil. Growth for the oil sector in Nigeria was –13.89 percent in Q3 2020 as compared to Q3 in the previous year.
Other causes of the recession in Nigeria
A recession is generally defined as two consecutive quarters of negative growth. In addition to the loss of oil revenue, lockdowns due to the coronavirus were imposed in the major cities of Lagos and the capital Abuja from late March 2020 to early May, as well as in other areas.
A ban was also placed on interstate travel that greatly affected the local economies. Tax revenue for the government in Q3 declined by –15.29 percent from the previous quarter.
Another cause of the recession in Nigeria was the disruption of the gas supply to neighboring countries due to an explosion in a major pipeline.
This happened four days after the resumption of gas supply to Ghana and Togo upon the completion of repair work after a fire in November 2020. Compared to Q3 in 2019, the growth rate for the Electricity, Gas, Steam and Air Conditioning Supply sector was –13.77 percent.
Long term solutions
“Besides immediate efforts to contain the spread of COVID-19 and stimulate the economy, it will be even more urgent to address bottlenecks that hinder the productivity of the economy and job creation,” said Shubham Chaudhuri, World Bank Country Director for Nigeria.
When the majority of government revenue is obtained from only one source, there are bound to be recessions due to the constant changes in supply and demand for oil with resulting price fluctuations. Clearly, economic diversification is crucial for the long term financial health of Nigeria.
If they could increase their free enterprise initiatives by giving people the skills and funding to start their own businesses, this would result in increased revenue for the government.
It would also help to increase the number of jobs, as the current unemployment rate hit 33.5 percent in 2020.
The first step will be to improve their education system. Currently, Nigeria has the highest number of children out of school in the world. According to the BBC, there are at least 10.5 million children not being educated due to cultural factors, nomadic communities and the Boko Haram insurgency.
However, out of an adult population of over 9 million, colleges produce about 600,000 graduates each year. Many graduates are considered underemployed due to the lack of white collar jobs.
Initiatives to diversify the economy and reduce unemployment should also include:
- End government corruption that cripples economic development.
- Match college and training school curriculum to the needs of employers.
- Improve roads, energy supplies and access to clean water.
- Reduce population growth.
- Strengthen entrepreneurship programs such as the Youth Employment and Social Support Operation (YESSO) and the Youth Enterprise with Innovation in Nigeria (YouWiN!)
- Improve education in technology.
- Reduce the retirement age for both government and non-government employees.
- Increase loans and grants for agricultural and other entrepreneurs.
The challenges in Nigeria are many. But with continued support from the international community and the foreseeable end to the coronavirus pandemic, the economic situation should slowly improve.
Suzanne Driscoll is a writer for Sharemoney from St. Petersburg, Florida. She has written for national publications on issues involving business, healthcare, education and immigration.