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Nigeria faces a tough time diversifying from oil

Kate Hairsine
October 13, 2021

Nigeria's dependence on crude oil makes its economy vulnerable. But the transition to an economy not based on oil won't be easy.

A woman walks along an oil pipeline in Nigeria
Oil has brought Nigeria great wealth but also many problemsImage: picture-alliance/AP Photo/G. Osodi

The oil sector has an outsize influence on Nigeria's economy despite representing a relatively small proportion of the gross domestic product: about 9% in 2020. But, in the same period, crude oil sales made up one-third of the government's budget revenue and about 90% of the West African nation's export earnings.

"This is bad because it makes Nigeria a very volatile country," said Tokunbo Afikuyomi, a UK-based economist who writes for the Nigerian financial publication Stears Business.

A worker inspects some pipes on a drilling platform in Nigeria
Nigeria is Africa's biggest oil and gas producerImage: Getty Images/AFP/P. Utomi Ekpei

When the price of crude oil is lower than government projections, gaping holes emerge in the federal budget.

Though this has been a problem in Nigeria for at least the past decade, the coronavirus pandemic has made it worse. The slump in global oil prices at the beginning of the pandemic meant Nigeria's oil revenues were around 65% lower than anticipated in the first half of 2020, causing a massive budget shortfall.

Furthermore, diminished oil sales means less money circulating in the country, making it tough for Nigeria's manufacturers to import the raw materials or components they need.

Finite fossil fuels

There are additional reasons why the nation of 206 million people should reduce its dependency on oil and gas, Taiwo Oyaniran, the associate director of the global consulting company PwC in Nigeria, told DW.

"What is happening globally is that a lot of countries are moving away from fossil fuels like crude oil as a source of energy, and they are moving towards clean energy," Oyaniran said.

"So it is quite important for us to consider other sources of revenue generation as a country," he added.

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Plus, Oyaniran said, Nigeria's oil resources will eventually be exhausted, making it "absolutely essential" to develop other areas of its economy.

Nigeria is seeking to advance agriculture, information and communications technology (ICT), and the creative industries, such as the thriving music and Nollywood film industries, as potential export alternatives.

Agriculture largely unproductive

Before the discovery of oil in Nigeria in the 1950s, agriculture was the backbone of its economy.

Half of Nigeria's workforce currently works in agriculture, Afikuyomi said, so "there is a school of thought that it's almost impossible to grow the economy or do any exports or any production without agriculture."

Palm oil, cocoa beans, sesame seeds and cashew nuts are among the crops identified as potential export earners.

Aerial view of a palm oil plantation in Indonesia
Countries such as Indonesia and Malaysia have overtaken Nigeria as global palm oil producersImage: Willy Kurniawan/REUTERS

Nigeria was once the world's leading exporter of palm oil, a vital global ingredient in many processed foods.

The government is investing heavily in the palm oil industry, providing, for example, an agricultural credit scheme that helps operators buy quality and up-to-date seedlings and set up new plantations and mills.

But it's a question of whether the agricultural sector can increase exports, analysts say, because it mainly involves small-scale farmers who are relatively unproductive, even compared with other African nations.

Nigeria's farmers can produce about 7,000 kilograms (15,400 pounds) of tomatoes per hectare (2.47 acres). In contrast, Kenya can produce 20,000 kilograms of tomatoes on a similar piece of land, according to Nigerian economist Afikuyomi.

Oyaniran also used tomatoes to illustrate the challenges in Nigeria's agricultural sector.

A women holds up a bucket of tomatoes at a market
Nigeria must increase productivity of crops such as tomatoes to expand its agricultural sectorImage: DW/S.Olukoya

"Almost 50% of tomatoes get destroyed from the farm gate to the market," he said, because of logistical issues arising from "poor road networks, poor packaging systems, and insufficient cooling and refrigeration systems."

Until Nigeria can solve these issues, he said, "we are not likely going to see huge investments coming into the agribusiness space."

Eyeing the ICT industry

Nigeria has long been home to one of the continent's most vibrant tech hubs.

The coronavirus pandemic gave the ICT industry an additional boost. Companies desperately sought remote working solutions for their employees, and people stuck at home turned towards digital communications, online banking, and shopping.

Jumia, Nigeria's largest online trader, reported turnover growth of about 30% for the first quarter of 2020. As a result, the ICT sector contributed nearly 18% of the GDP in the second quarter of 2020 compared to 10% in 2018.

A large part of this increase came from financial technology (fintech) as the need for cashless payments, mobile transactions and easy loans exploded during the pandemic.

Nigeria attracted just over $134 million in fintech venture capital in 2020, capturing more fintech funding than anywhere else in Africa.

An estimated two out of five Nigerians are financially excluded. This, combined with the country's youthful population and increasing smartphone penetration, "creates the perfect recipe for a thriving fintech sector," according to KPMG, an international consulting company.

"We're seeing more and more unicorn companies, companies valued at more than $1 billion [€ 860 million], popping up in Nigeria's tech innovation ecosystem, so that's only going to grow and grow," Afikuyomi said.

The ICT sector, including fintech, still faces myriad hurdles, such as Nigeria's patchy and erratic electricity supply, a fragmented fiber-optic internet network, and a shortage of trained software engineers.

A train stops at a train platform in Nigeria
Nigeria is building a new rail line between Lagos and Ibadan as part of its infrastructure pushImage: AFP via Getty Images

Infrastructure not enough

The country's crumbling infrastructure is a major impediment to Nigeria's push to pivot from oil.

In 2020, President Muhammadu Buhari's administration announced a new infrastructure drive, with multibillion-dollar plans to upgrade roads, railways, bridges, airports and power supply.

Oyaniran said Nigeria's growing insecurity was one of the biggest threats to economic-diversification efforts.

Boko Haram insurgents still hit Nigeria's northeast. The northwest is wracked by banditry and kidnapping, whereas the north-central is plagued by violent disputes between farmers and nomadic herders. The southern part of the country has also seen its fair share of attacks and kidnappings.

"Unless we are able to effectively curtail the security issue, the expected outcome from all the investment in infrastructure might not be realized," Oyaniran said.