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Here are reasons Nigeria’s oil sector will never be key contributor to GDP

The oil industry has been buffeted with a lot of challenges. It has not really lived up to expectation, as far as contribution to GDP growth generally. The point is in 2019, it was actually the sector that drive our GDP numbers, most of the other sectors were down, such as agriculture, manufacture was negative, ICT.

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oil, sector, GDP, CBN's Balance of Payment (BOP) brief

Victor Ndukauba, the Deputy Managing Director of investment banking firm, Afrinvest (West Africa) Limited, has disclosed reasons Nigeria’s oil sector will never really be key contributor to the Gross Domestic Product of the country. 

Ndukauba said this while reacting to the oil sector’s 10% contribution to the GDP despite generating over 90 per cent to the nation’s revenue. According to him, due to low economic activity in the sector, the oil sector wouldn’t be a key contributor to the GDP growth. 

In his explanation, he also said it’s not a large employer of labour, On the one hand, the oil industry has been buffeted with a lot of challenges. It has not really lived up to expectation, as far as contribution to GDP growth generally. The point is in 2019, it was actually the sector that drive our GDP numbers, most of the other sectors were down, such as agriculture, manufacture was negative, ICT. But having said that, historically, I think it goes for most other countries, in terms of GDP contribution, you wouldn’t expect oil to be a key contributor. 

[READ ALSO: Poultry farmers beg President Buhari not to reopen borders(Opens in a new browser tab)]

Normally, what GDP measures is the flow of economic activities. Unfortunately, the oil industry is limited, with extremely specialist skills and skilled people. If you are talking of either exploration or you are acquiring your seismic data or you’re actually drilling to explore to see what potential you would be able to uncover in the process of exploiting those resources on a commercial quantity. So it’s not typically the large employer of labour. 

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Perhaps, you can argue that we should do a lot more in the value chain, having operated that industry for nearly 50 years. But the reality is that if you come down to it, it’s one of assets, servicing the assets, it’s not something that is going to be common to the average Nigerian to be able to get into that value chain. The truth is that the oil sector will never really be key contributor to the GDP for the mere fact that it doesn’t attract a lot of economic activity. 

Impact of oil policies for Nigeria: Ndukauba said policies implemented have its role on the revenue generated by the oil sector. He, however, said in a The Nation report, that the rule governing Nigeria’s oil and gas industry are still many and complicated, “At the last LBS breakfast programme, there was a presentation by the CEO of Chevron for Nigeria, where he laid out some of the implications of the revised rules around the Production Sharing Contract and what it means for Nigeria. Well, from his summary, if I recall, is that what Nigeria is actually trying to do is to increase the amount of revenue and be sure of whatever revenue comes from deep offshore as a percentage of the total. So, it’s for good reason. 

“The truth is that policy needed to have been revised for a long time based on the oil price when it was $75, which we have longed gone past. I think the challenge however, and that’s where the industry operators are complaining is that, within the context of a country that has been trying to reform the rules governing the entire industry, which is the Petroleum Industry Bill (PIB). 20 years down the line, we haven’t quite made any headway with that. Instead, there are several laws still operating there, such as the governance, industry operational bill, we still haven’t quite got anything going.” 

Ndukauba added that, “Unfortunately, in that space of time, crude oil has been discovered by a couple of other countries and they have, learning from Nigerian mistakes, essentially made more better and clear rules for operating. So the big challenge really, the rule governing Nigeria’s oil and gas industry are still many and complicated. And our neighbours have simplified their own rules and therefore are becoming more and more attractive to capital. And I think that’s where the risk is. We’re acting as if we have all the time in the world, and we feel that because it’s Nigeria, people will always want to come in whereas capital is not emotional, capital is usually very rational. It’ll go where it is most welcomed. I think that is really the fear of our operators, that look, we don’t have so much time left given several other things happening at the international scene in terms of investment in renewables, and how that is impacting the whole industry. So it’s a major challenge. 

“Having said that, I think the philosophy behind that change is not wrong. What may be the issue is when you actually look at the quantum of the adjustment and what it means for operators. If I recall correctly from that presentation, you will see that the operators now based on the new rules would be getting about 30 per cent or less on the economics on the revenue they make from what they produce from deep offshore. 

So what that means us that if I sell a barrel of crude oil at $60 and all I can get is maybe $6, as my own share of revenue. So having taking the risk of going to source capital to invest in that field and earn a return, why will I bother doing that, I would rather go somewhere else. I think that’s really the concern and it’s a valid concern.Ndukauba said.

Olalekan is a certified media practitioner from the Nigerian Institute of Journalism (NIJ). In the era of media convergence, Olalekan is a valuable asset, with ability to curate and broadcast news. His zeal to write was developed out of passion to shape people’s thought and opinion; serving as a guideline for their daily lives. Contact for tips: [email protected]

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Business

De facto Government: CBN explains why it will keep funding the economy

The Central Bank of Nigeria provided reasons why it will keep spending on development activies such as its intervemtion funds in the agricultural and energy sectors.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

The Central Bank of Nigeria provided reasons why it will keep spending on development activities such as its intervention funds in the agricultural and energy sectors. The central bank has carried on as a form of de facto government in recent years particularly in the Covid-19 months, funding several developmental activities and sectors in the economy.

The explanation was provided in its monetary policy communique read out by the CBN Governor, Godwin Emefiele following the end of the monetary policy committee meeting held on Tuesday.

According to Mr. Emefiele, it will keep spending because the Federal Government is currently incapable of funding development programs because it is facing revenue shortfalls. The CBN reckoned that the economy is faced with likely stagflation (a combination of an economic recession and high inflationary environment) even as Nigerians still have to deal with an increase in fuel and energy prices. It opined that it had to work harder to combat the pressure the price increases will have on Nigerians.

“The Committee was therefore of the view that to abate the pressure, it had no choice but to pursue an expansionary monetary policy using development finance policy tools, targeted at raising output and aggregate supply to moderate the rate of inflation.

At present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.

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Therefore, monetary policy must continue to provide massive support through its development finance activities to achieve growth in the Nigerian economy. This is the reason MPC will continue to play a dominant role in the achievement of the goals of the Economic Sustainability Program (ESP) through its interventionist role to navigate the country towards a direction that will boost output growth and moderate the level of inflation.”

As part of its plans to inject stimulus into the economy, the central bank committed to a stimulus package of about N1.1 trillion through the government’s Economic Sustainability Plans revealed in June.

CBN to the rescue: Over the last few months the CBN has been at the forefront of leading developmental activities in the country despite overseeing monetary policy and not fiscal policy.

  • The role it is currently playing should be that of the Ministry of Finance, but with government revenue on decline, it believes it has no choice but to come in as a spender of last resort. T
  • he CBN through its development finance responsibilities has the powers to fund activities in the economy that it believes will create jobs and reduce the inflation rate.

But more recently, it has been criticized for expanding its balance sheets and playing too big a role in backstopping nearly all major developmental program of the Buhari administration.

  • The CBN is currently spending trillions funding the agricultural sector
  • It has also set aside hundreds of billions of naira in funding SME’s through NISRAL and partner microfinance banks
  • There is also several targeted private sector spending in the areas of power, healthcare, real estate, entertainment etc.

 

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Coronavirus

COVID-19 Update in Nigeria

On the 22nd of September 2020, 176 new confirmed cases were recorded in Nigeria.

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The spread of novel Corona Virus Disease (COVID-19) in Nigeria continues to record increases as the latest statistics provided by the Nigeria Centre for Disease Control reveal Nigeria now has 57,613 confirmed cases.

On the 22nd of September 2020, 176 new confirmed cases were recorded in Nigeria, having carried out a total daily test of 3,177 samples across the country.

To date, 57,613 cases have been confirmed, 48,836 cases have been discharged and 1,100 deaths have been recorded in 36 states and the Federal Capital Territory. A total of 484,051  tests have been carried out as of September 22nd, 2020 compared to 480,874 tests a day earlier.

COVID-19 Case Updates- 22nd September 2020,

  • Total Number of Cases – 57,613
  • Total Number Discharged – 48,836
  • Total Deaths – 1,100
  • Total Tests Carried out – 484,051

According to the NCDC, the 176 new cases were reported from 14 states- Lagos (73), Plateau (50), FCT (17), Rivers (8), Ondo (6), Niger (5), Ogun (5), Edo (3), Kaduna (3), Oyo (2), Bauchi (1), Bayelsa (1), Delta (1), Nasarawa (1).

Meanwhile, the latest numbers bring Lagos state total confirmed cases to 19,055, followed by Abuja (5,583), Plateau (3,304), Oyo (3,233), Edo (2,615), Kaduna (2,359), Rivers (2,263), Delta (1,800), Ogun (1,772), Kano (1,734), Ondo (1,606), Enugu (1,285), Ebonyi (1,038), Kwara (1,025), Abia (881), Katsina (848), Gombe (839), Osun (817),  Borno (741), and Bauchi (692).

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Imo State has recorded 562 cases, Benue (473), Nasarawa (449), Bayelsa (395),  Jigawa (322), Ekiti (317), Akwa Ibom (288), Niger (259), Adamawa (234), Anambra (232), Sokoto (161), Taraba (95), Kebbi (93), Cross River (85), Zamfara (78), Yobe (75), while Kogi state has recorded 5 cases only.

READ ALSO: COVID-19: Western diplomats warn of disease explosion, poor handling by government

Lock Down and Curfew

In a move to combat the spread of the pandemic disease, President Muhammadu Buhari directed the cessation of all movements in Lagos and the FCT for an initial period of 14 days, which took effect from 11 pm on Monday, 30th March 2020.

The movement restriction, which was extended by another two-weeks period, has been partially put on hold with some businesses commencing operations from May 4. On April 27th, 2020, Nigeria’s President, Muhammadu Buhari declared an overnight curfew from 8 pm to 6 am across the country, as part of new measures to contain the spread of the COVID-19. This comes along with the phased and gradual easing of lockdown measures in FCT, Lagos, and Ogun States, which took effect from Saturday, 2nd May 2020, at 9 am.

On Monday, 29th June 2020 the federal government extended the second phase of the eased lockdown by 4 weeks and approved interstate movement outside curfew hours with effect from July 1, 2020. Also, on Monday 27th July 2020, the federal government extended the second phase of eased lockdown by an additional one week.

On Thursday, 6th August 2020 the federal government through the secretary to the Government of the Federation (SGF) and Chairman of the Presidential Task Force (PTF) on COVID-19 announced the extension of the second phase of eased lockdown by another four (4) weeks.

READ ALSO: Bill Gates says Trump’s WHO funding suspension is dangerous

 

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Economy & Politics

FG needs to focus on business environment reforms – Sanusi

While speaking at the Kadinvest 5.0 Summit in Kaduna, the former CBN Governor gave salient suggestions to revamping the economy.

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FG needs to focus on Business environment reforms- Sanusi

Former CBN Governor, HH Muhammadu Sanusi II has said the Nigerian government needs to focus on reforms that enable a better business environment and also called for economic diversification through maximizing technology as means to generate revenue away from crude oil.

Muhammadu Sanusi II disclosed this at the Kadinvest 5.0 Summit in Kaduna on Tuesday morning. Sanusi said the Nigerian government’s role in the economy should be small, both in absolute and relative terms. Sanusi cited Nigeria’s GDP per capita and tax revenue per capita, at $2,400 and $75 respectively, while development spending is just $36 compared to Kenya at $280 tax revenue per capita, and development spending of $280, despite having 90% of Nigeria’s GDP per capita at $2,151.

“Government needs to multiply its tax revenue, the government needs to spend on business environment reforms,” he said.

(READ MORE: Can Agriculture replace Oil in Nigeria?)

Solutions for Nigeria:

He said that the diversification made colonial Nigeria an economic success, based on the trading sector and the diversity of Nigeria’s export base, including palm oil, groundnuts, cocoa, tin, hides and cotton, and others. He added that the diversity of export meant Nigeria was less vulnerable to terms of trade shocks driven by one export in particular.

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“Nigeria has suffered boom and burst periods due to oil valuations. It affects us in direct and personal ways. The government needs to understand the importance of wrong and adverse economic decisions on the human being,” he said.

Sanusi cited inflation numbers, saying Nigeria ignored inflation numbers of 2%, instead of breaking down the CPI and seeing how it affects millions of people who spend on food from minimum wages and how a 2% inflation growth wipes out earnings.

(READ MORE: Has the President erred in stopping CBN from funding food imports?)

He compared Nigeria’s growth in the past 40 years with countries similar to countries like Malaysia. He added that Malaysia’s export base has been diversified from commodities to manufactured goods in the past 30 years.

By 1979, Malaysia’s top 2 exports were Crude Rubber and Cork and Wood. By the year 2000, Malaysia’s top 2 exports were Electrical Machinery and Office machines/Automated Data Processing equipment. Malaysia’s GDP per capita grew in the same period from $41 to $4,045. Compared to Nigeria’s GDP per capita, which increased from $345- $2,655 from 1985-2015, but failed to diversify export base as Crude Oil was Nigeria’s top export for the period.

“We were growing, but we did not diversify and that explains the huge level of poverty. It also explains the vulnerability of the economy to shocks,” he said.

Sanusi added that the failure to diversify explains the relativity of Nigeria’s slow pace, compared to Nigeria’s growth for the same period.“We have not moved in all these years. This is the difference between us and Asia, they moved!”

(READ MORE: Sanusi gets another major appointment)

On growth and structural change:

Sanusi made a case for a change of mindset with technology adaptation. He added that the wide usage of smartphones does not mean Nigeria has leapfrogged development, as we are not a producer of technology but primarily, a consumer.

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He added that Nigeria is yet to leverage on the investments in the telecoms sector. “Infrastructure in Africa has become increasingly decoupled from tech training. Someone who uses a smartphone to produce a Nollywood movie is producing! We need to invest in human capital to boost technology innovation, the smartphone is a ticket to wealth… Every excuse Nigeria has to not grow, Indonesia and Malaysia had. We need to move away from a consuming attitude( with technology) to production,”

(READ MORE: Why Africans are fast using Bitcoin for payment transfers)

On Power generation for productivity:

“In a low-income environment, income elasticity is far more important than price elasticity. People would pay for electricity if they could use it to earn,” he said. “Look at electricity as an economic resource, look at how much you could make. There is a difference between not earning a thing and earning something.”

He cited how China focuses on two major metrics, which are; the number of employed and the number of those with access to electricity, citing the per capita contribution of electricity to production needed to move people away from poverty.

He encouraged skilled jobs that leverage technology, which would enable growth and also remove the pressure of Oil money on the states.

“Youths need an environment that has been created to give them skills. We need to invest in broadband as an economic resource,” he said citing the importance of skill transfers in developing broadband infrastructure.

(READ MORE: Shell to focus on Nigeria, Gulf of Mexico and others as it seeks to cut 40% of costs)

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On patterns for structural changes:

Sanusi said East Asia has moved from agriculture to manufacturing and later services, majorly from the informal to the formal sector. However, in Nigeria, the bulk of a similar change has been in the informal sector.

“Manufacturing GDP in Africa has fallen from 14% in 1990 to 10.1% today. Formal job creation has been modest. This is partly because of a mistaken view that Africa can simply leapfrog manufacturing to become a service-based economy. We have declining activity, while the rest of the world has increased activity”.

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He added that an enlightened industrial policy will translate to meaningful job creation. He concluded that Nigeria needs to link infrastructure development to economic growth. “You have to make sure your projects are linked, you don’t just build a road here, a rail line there, an airport there without knowing how there are going to translate into an economy.”

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He also mentioned that Nigeria’s Public Debt has risen, and due to high inflation he cannot see how the CBN can keep expanding its balance sheet.  He urged the FG to spend more time creating the environment through reforms that will attract the investments while also fixing the balance sheet.

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