From James @ Frontier Markets

It’s been on the list for almost every Nigerian government administration in the last few decades, but the shift towards a much more sustainable country needs move at an accelerated pace.

Oil and gas remain as the dominant source of income for Nigeria, making it much more susceptible to swings in prices and other exogenous shocks that can impact the sector. Crude accounts for less than 10% of Nigeria’s GDP, but makes up half of the government’s revenue. The collapse of the crude oil price in March/April this year was a major blow to the Nigerian economy.  Earlier today, the Abuja-based National Bureau of Statistics announced that gross domestic product (GDP) fell by 6.1% in the second quarter of the year, compared with a 1.87% increase in the first quarter of 2020. What were cited as the causes of the fall? A crash in oil prices combined with the ongoing coronavirus pandemic. The International Monetary Fund (IMF) forecasts a 5.4% contraction this year for the Nigerian economy.

If the situation was reversed – that is, oil prices were on a tear – then the argument to diversify still remains. A heavy reliance of a single commodity can make or break developing markets. If we look towards the Middle East, countries such as Kuwait and Saudi Arabia have implemented plans to establish more sustainable forms of energy while maintaining a workable level of oil output. All things being equal, diversification reduces risk.

Allocating a significant part of Nigeria’s budget towards greener practices will not only reduce risk, but it will also create jobs in a nation that is currently suffering from high levels of unemployment. Renewable energy production may even provide energy generation opportunities in rural areas of the country where electricity and other forms of power are scarce. Policy must also encourage private enterprise. Striking the right balance between private production and public policy will lead the country towards a much more sustainable future and the “mixed economy” approach is likely to be the more efficient outcome.

Get our Emerging Markets updates for free every morning!

Leave a Reply

Your email address will not be published.