Nigeria's oil and GDP troubles

“Where sickness thrives, bad things will follow”[1]. Nigeria's GDP growth slowed from 3.54% to 2.25% year-on-year in the second and third quarter of this year respectively. This was chiefly due to an ongoing slump in the oil sector, which shrank by -22.67% in the last quarter, and now Central Bank of Nigeria (CBN) Governor Godwin Emefiele is quoted saying “the official foreign exchange receipt from crude oil sales into our official reserves has dried up steadily from above US$3.0 billion monthly in 2014 to an absolute zero dollars today”. The below three graphs chart this story.

Benefit in limbo

The oil sector here is shrinking despite the enactment of an industry reform law last year. The aim of that law was purportedly to spur activity and curb insecurity, which is induced by host community discontent regarding the country's distribution of oil revenue. That legislation has evidently not yielded the desired results.

Nigeria's oil output has now fallen to nearly half the amount it was eight years ago. Large-scale theft from pipelines has alarmed producers and deterred both production and further investment. As a result, the oil sector's contribution to GDP is now only 5.7% compared to 10.4% eight years ago.

The economic consequences extend even further because oil and gas make up about 90% of export revenue. This means the central bank's capacity to shore up the naira is increasingly limited. Foreign reserves are down by 8% this year, and so is the official value of the naira - by 6%.

However, currency volatility has been even more pronounced at the widely-used parallel market rate, and businesses in the country continue to see a sharp rise in costs because of the currency depreciation. Inflation was 21% last month.

Outlook

The large-scale oil theft in host communities is unlikely to abate in the medium term. In fact, the signs are that it will deteriorate without new interventions. Offerings in the new Petroleum Industry Act have only further antagonized host community actors. Meanwhile, instances of collusion between culprits of theft and security and regulatory officials continue. Elections are scheduled to take place in February next year. See: Nigeria's 2023 election candidates spell out their economic plans (November 2022). Songhai Advisory.

[1] Tolkien, J. R. R. (2012). The Hobbit. HarperCollins.

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