The Oil Boom & It's Implications On The Nigerian Economy

The discovery of crude oil in Nigeria is a watershed event that signified a remarkable change in the political and economic history of the country. Prior to this period, the Nigerian economy was sustained by agriculture and each region specialized in the production of certain crops for which Nigeria was a major global producer. The eastern region was renowned for oil palm cultivation, while the northern and western regions were popular in growing cocoa and groundnut, respectively. Other cash and food crops grown in different parts of the country, which contributed to the national GDP, included rubber, cassava, yam, etc. Fisheries was also a major source of livelihood, especially for the riverine population residing predominantly in the coastal Niger Delta and Lagos.

Crude oil exploration in Nigeria brought enormous economic prosperity, while at the same time severe environmental degradation. The Nigerian economy grew geometrically during the oil boom era but not much attention was paid to the negative impacts of petroleum exploration on the physical, social, economic, and cultural well-being of the inhabitants of the oil-producing region and their environment. With the passage of time, environmental degradation became severe and affected fisheries, which is the major source of livelihood for the people living in the Niger Delta. This economic stagnation resulted in youth restiveness which has engulfed the region in the last two decades. In a bid to solve the problem, the Nigerian government under the leadership of President Umaru Yar’Adua implemented an amnesty program that successfully disarmed the militant youths, trained them in vocational jobs, and gradually integrated them back into the larger society.

This article looks at the interrelationship between the politics of crude oil exploration and its impacts on the aquatic and human ecology of Nigeria, examining the impacts of petroleum industry activities on the lives of the indigenous population, as well as identifying the challenges facing the Nigerian economy.

Economic Impact Of The Oil Boom: Early Years

Nigeria, a member of the Organization of Petroleum-Exporting Countries (OPEC), is an exporter of coveted high- (bonny light) and medium-grade crude oil. Oil price shocks of 1973-74 and 1979 resulted in a large transfer of wealth to Nigeria. Public expenditure increased greatly, as did the country's access to international capital markets. Evidence of "Dutch disease" emerged during this period: agriculture, the main nonoil tradables sector, declined. Following the collapse of oil prices in 1982 and the rise in real interest rates, Nigeria experienced rising inflation, strict rationing of foreign exchange, and the possibility of debt.

Faced with higher immediate and anticipated income after 1973, the Nigerian government had a range of choices: it could consume the increase currently, in the future, or spread the increased consumption over time. If part of the wealth were to be saved for future consumption, this could be achieved via increased investment in foreign assets or domestic physical capital. Finally, it could spend more than the current addition to income, that is, it could borrow. The decisions on these issues are based on interactions between the social rate of time preference (consumption now versus later), the relative rates of return between physical and financial assets (a question of portfolio choice), and expectations regarding oil prices and, hence, future revenues.

The dominance of oil in the Nigerian economy is evident, the share of oil in gross domestic product (GDP) and exports rose sharply after. This rendered the Nigerian terms of trade virtually synonymous with 1970-73 the price of oil deflated by the import price index. In all the years except those immediately following the two oil shocks, domestic absorption exceeded GDP and national disposable income. This was reflected in current account deficits, which arose in 1976-78 and 1981-83. Rescheduling. This coincided with the rise of parallel markets, so that an illegal, floating-rate parallel market coexisted with an official, fixed-rate market.

Later Years: The Negative Outcome

For Nigeria, cocoa is virtually all that is left of agricultural exports. Low profitability is reflected in a roughly 50 percent decline in the volume of exports since the early 1970s, and a drop in Nigeria's position in world production from about 16 percent in the preboom years to 8 percent today. Once a net agricultural exporter, Nigeria now spends more on import of agricultural products than it earns from its agricultural exports. Both exportables (cash crops such as cocoa and rubber) and importables (food) have been affected by the real appreciation of the exchange rate and the exodus of labor to urban centers. Some deterioration in agriculture following the oil boom may be regarded as unavoidable, but the decline of Nigerian agriculture was certainly exacerbated  by erratic import and agricultural pricing and marketing policies. Since 1982 foreign exchange rationing and strict import licensing have increased the premium on illegal sale of foreign exchange and improved the outlook for food, as an import-competing product. But this is more due to questionable macroeconomic policy than a corrective policy for agriculture.

Implications of the Exchange Rate Regime

The overvaluation of the naira is explicit in the high and growing parallel market foreign exchange premium, and implicit in the strict official rationing of foreign exchange. Since the government has reduced the real deficit, a devaluation should be effective in depreciating the official real exchange rate. The efficacy of a devaluation is enhanced because it is likely to be noninflationary. The reason is that a considerably more depreciated exchange rate than the official rate is already implicit in the domestic price of tradables, reflecting the scarcity premium in the illegal foreign exchange market. The devaluation would largely amount to a tax on rents received by those who get import licenses. Second, if the cut in the deficit/GDP ratio is seen as credible and sustainable, a devaluation will accelerate adjustment to a lower parallel exchange premium, reducing the desirability of  parallel channels.

The present system is both inequitable and inefficient. It is inequitable because it results in a large transfer of unearned income, "rents," to those who obtain licences. Importers are subsidized at the expense of exporters who surrender their foreign exchange earnings at the official rate but do not get the entire amount back for subsequent imports and of the central bank to the extent that it runs down reserves to finance the import program. The size of the unearned income can be estimated as the difference between the exchange rate implicit in the ultimate naira price of items officially imported, and their cost, insurance, and freight  naira price at the official exchange rate. 

Conclusion

This article provides a perspective on the Nigerian experience during and after the oil boom. It stresses that what mattered during the boom was the spending effect and its impact on resource allocation in the nonoil economy. With oil revenues accruing to the government, the composition and timing of public spending were crucial in the adjustment to the boom. The article reveals that there were important differences within the country with regard to fiscal and exchange rate policies. Principal differences also existed in her foreign borrowing strategies which were less conservative in Nigeria and agricultural policy which was less market-oriented and included provision of transitional assistance in Nigeria.

Lastly, post-oil boom adjustment issues for Nigeria have been discussed. While fiscal austerity has decreased government spending, the question of exchange rate unification (minimization of the parallel market premium) remains. One frequently encountered the following argument in Nigeria: "Oil is dollar-denominated and virtually our only export. What purpose then would be served by an exchange rate adjustment?"