Economics (AS & A Level) · May / June 2023 · Paper 22 · Question 1

Is Nigeria being held back by its dependence on oil and gas? Nigeria has about half of West Africa’s population with approximately 202 million people and one of the largest populations of young people in the world. With an abundance of natural resources, it is Africa’s biggest oil exporter, and has the largest natural gas reserves on the continent. Nigeria is highly vulnerable to the global economic disruption caused by the COVID‑19 pandemic, particularly due to the steep decline in oil prices. Nationally, 40% of Nigerians live in poverty, while another 25% are vulnerable and could fall into poverty due to the pandemic. Oil accounts for 80% of Nigeria’s export revenues, a dominant position that it has occupied since the 1970s. Many people believe that Nigeria needs to move further away from its dependence on oil and natural gas. Initial attempts at diversification have produced limited gains as the policies have been aimed mainly at the domestic market to create jobs and to improve living standards. There needs to be a focus on export‑orientated manufacturing that should boost economic growth as it has done in countries such as Malaysia and Indonesia. Based on the experience of these countries, more open trade and competition policies would help to diversify the economy, especially as the African Continental Free Trade Area (ACFTA) takes effect. Nigeria needs to create at least five million new jobs each year to employ its growing population of young people. Table 1.1 Nigeria: key economic indicators 2016 2017 2018 2019 2020 Economic growth rate (% change in real Gross Domestic Product (GDP) per year) 1.6 0.8 1.9 2.2 –1.8 Inflation rate (% change in Consumer Price Index (CPI) per year) 15.7 16.5 12.1 11.4 12.8 Current account balance (% of GDP) 0.7 2.8 1.30 –3.8 –3.7 Government budget balance (% of GDP) –3.9 –5.4 – 4.5 – 4.3 –5.2 Unemployment rate (% of labour force) 7.0 8.4 8.5 8.5 9.0 Source : Global economy.com 3 Nigeria’s economy entered a recession in 2020 due to fall in crude oil prices caused by falling global demand and measures to fight the spread of COVID‑19. Inflation rose in 2020 due mainly to higher food prices, the removal of fuel subsidies and an increase in the price of electricity. The budget deficit also worsened in 2020 because the COVID‑19 pandemic caused higher government spending and lower tax revenues, adding to the national debt. Nigeria’s national debt is sustainable at 25% of GDP, but interest payments are high, accounting for about 50% of government spending. Nigeria’s government could improve its finances by reforming domestic tax collection. Non‑oil tax revenue is equivalent to just 4% of GDP. An increase in the rate of value‑added tax (VAT) from 5% to 7.5% in 2020 resulted in less revenue than forecast because of the recession. A wider tax base could help the budget, but this will require significant reform to reduce both tax evasion and a large informal economy. Sources: Adapted from: World Bank in Nigeria Nov 2020 and: IMF News, African Department, February 2020 and: African Development Bank Group: Nigeria Economic outlook, 2021

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