Thursday, 22 September 2016

THE REALITY OF ECONOMIC RECESSION (PART II)


Oil Money
By: Bello AbdulRauf Aremu (Rufy B)

In continuation of the previous analysis on the current Nigeria’s economic recession, the story continues and I shall take off from where I stopped, when oil was discovered in Nigeria.
Crude oil was discovered at Oloibiri, Bayelsa State in the year 1956. However, commercial production started in early 70s. With the arrival of crude oil, the Nigerian economy raised a lot of revenue, most especially with the oil boom that came in the early 70s. Nigeria’s crude oil is regarded as ‘light’ and ‘sweet’, in the sense that it has very low sulphur. The lower the sulphur, the higher the quality of crude oil products. Nigeria is the largest producer of ‘sweet oil’ in OPEC.
Oil production was really great and profitable in which Nigeria rose to be the wealthiest country in Africa. Between 1958 and 1974, government revenue increased from N200,000 to
N3.7bn. Nigeria further bolstered profits when it joined OPEC  in 1971. There was a global scarcity of oil in the international oil market then which paved way for Nigeria to sell very well and thus, massive profitability of crude oil.


The very high revenue earned from crude oil facilitated so many activities in the Nigerian economy. There were various constructions of capital projects such as bridges, schools, Murtala Muhammed International Airport, new oil refineries, thousands of kilometers of tarred roads, inauguration of several housing schemes, creation of six new federal universities in April 1975 (including my alma mata, UNILORIN); establishment of NYSC, hosting of World Black and African Festival of Arts and Culture (FESTAC 1977) and new salary package to workers.


If we remember from history that there was civil war (1967 to 1970), between the Nigerian government and Biafran forces led by late Odumegwu Ojukwu. That was partly due to problems associated with revenue allocation that almost split the country. After the war, the then government initiated a second national development plan (1970-1975) in which provisions were made for increased government spending to rehabilitate and renovate dilapidated structures consumed by the war. There was mass importation of cement during this period to construct buildings (this was a main factor that paved way for Aliko Dangote’s rise as he was able to secure contracts to supply before he started manufacturing cement himself). The oil boom also facilitated implementation of the second national development plan.


Due to juicy profits in the petroleum sector, investments in other sectors declined as bulk of investments were in the oil sector. So many investors (both local and foreign) came into the sector to make excess profits, politicians started jostling to own oil blocs, corruption was very high, the so much drilling of oil led to massive gas flaring and oil spillage that hampered the atmosphere and environment. Other sectors in the economy declined gradually.


The increase in income of all economic agents (government, firms and household) in the country led to a change in appetite of Nigerians, our consumption pattern changed and we started importing foreign goods (because it could be afforded as a result of new salary package). Local goods became inferior. Rice that was being produced in Nigeria became inferior to Uncle Ben’s rice; other commodities too were being imported on large scale. There was no patronage for local goods and when the producers realized that there was no demand for their products, they had to pack up and invest in the ‘juicy sector’ (i.e. petroleum sector) and the rest became history.
The pattern went on until 1980 when there was ‘oil glut’ (similar to what is currently happening in the international oil market).


The word ‘glut’ means ‘plenty’, ‘full supply’, ‘over abundance’. Therefore, oil glut means overabundance of oil in the international oil market. What this is saying is that oil production was high by various oil producing countries. The higher  supply of crude oil made the price of crude oil to drop. The logic is simple. The higher the price, the higher the supply. Also, the higher the price, the lower the demand. In the 70s when there was oil boom, oil producing nations produced in a very large quantity (because of the high price which enticed them). They kept on producing and producing to the extent that it exceeded the demand of crude oil by oil consuming nations. Don’t forget that while the high prices of crude oil facilitated higher supply, it also meant that there would be lower demand.


Therefore, the excess supply coupled with lower demand led to crash in oil price in the international oil market because when there is overproduction, producers would be forced to reduce price of goods so as to serve as an incentive for buyers to buy more (after all, it is better to sell at a lower price than for the remaining goods to be wasted).


The earlier boom in the 70s had placed the country on a very high level of spending and consumption such that when there was oil glut, it meant lesser revenue for government. The government couldn’t fulfill its obligations again and there was severe economic hardship. Coincidentally, the then Head of State was General Muhammadu Buhari rtd (1983-1985). The problem extended to the tenure of General Ibrahim Babaginda rtd (1985-1993). Due to the economic hardship then, General Ibrahim Babangida initiated Structural Adjustment Programme (SAP) as suggested by the International monetary Fund (IMF) which contained several austerity measures including importation ban on some commodities, devaluation of currency, privatization of public enterprises, to ameliorate the economic problems then.
Between 1986 and 1988, when these policies were executed, the Nigerian economy boosted, as the export sector was growing, but fall in real wages of economic agents, coupled with sharp reduction in expenditure on public services made the programme very difficult to maintain. The extra-ministerial parastatals created then which included the Directorates of Food, Road and Rural Development Infrastructure (DFRRI); the Better Life Programme, the National Directorate for Employment etc. became conduit pipes to siphon money from the national treasury.


The lower crude oil price started resuscitating in 1990 when the gulf war started. The gulf war was between the United States and Iraq. Due to the US invasion of Iraq,  the then Iraqi dictator late Saddam Hussein stopped exportation of crude oil to US which paved way for Nigeria again. The scarcity induced by the war between Iraq and US brought the price up to unprecedented level. Nigeria earned over $12.4bn (popularly known as ‘gulf war windfall’ during the period but was unaccounted for by Ibrahim Babangida then.


However, to cut the long story short, things went back to normal later and the economy was relatively stable. And then, 1999 came and Nigeria ushered into a democratic rule for the second time (the first was in 1979 when Alhaji Shehu Shagari was elected president. The administration lasted for four years before a military coup by General Muhammadu Buhari  the civilian government).
Chief Olusegun Obasanjo became president while Alhaji Atiku Abubakar was his vice. Chief Olusegun Obasanjo was once a military Head of State in 1975.
How did the economy fare in this new era of democracy? What role did democracy play in the recession currently experienced by the Nigerian economy? What impact did chief Olusegun Obasanjo make?




To be continued…………………………………………


N.B. we are gradually getting to the economic recession currently in Nigeria.

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