Project Materials

DIVERSIFICATION OF THE NIGERIAN REVENUE BASE; CONTRIBUTION OF THE NON OIL SECTOR

Chapter one

INTRODUCTION

BACKGROUND OF THE STUDY

The rate of expansion of any economy is heavily reliant on resource mobilisation. Such growth, however, is driven by the amount of revenue earned by the country to accomplish its stated goals.

For any economic body in Nigeria, revenue creation, among other things, is aimed at addressing the basic social and infrastructure demands of its citizens and maintaining long-term growth.

Prior to the 1970s, Nigeria’s revenue was primarily derived from non-oil industries including agriculture and minerals. Foreign exchange was gained through the sale of various crops such as cocoa, rubber, coffee, cotton, palm produce, groundnut, and others.

Non-oil exports accounted for more than 74% of the total revenue earned by the country, with oil revenue accounting for the remaining 26%. However, with the discovery of crude oil, particularly during the oil boom of the 1970s, major changes occurred in the structure of Nigeria’s economy.

Nigeria is a country with abundant people and natural resources, but the government’s priority since independence has been on crude oil discovery and exportation, at the expense of other economic activities that may provide much-needed foreign exchange revenues.

As a result, by 1985, oil money accounted for 73 percent of overall revenue produced by the country, while non-oil revenue accounted for only 23 percent. In 2000, oil and gas exports amounted for more than 98% of all exports and almost 83% of federal government revenue (Odularu, 2008).

From 1970 to 1999, oil produced over 90% of Nigeria’s export income and generated $231 billion in rents, accounting for 21% to 48% of GDP. However, these rents did not increase per capita income or reduce poverty.

Worse, the amazing improvements in the oil sector only served to herald the beginning of the non-oil industry’s terrible performance.

Although oil money has significantly contributed to Nigeria’s economy, there is a growing worry among scholars and non-researchers about the country’s overreliance on the oil sector and the need for economic diversification (Sanusi 2003).

The Structural Adjustment Program in 1986 aimed to shift Nigeria’s reliance on oil money to a more productive macroeconomic environment, as emphasised by the speaker.

He regrets, however, that more than 15 years later, there has been no discernible change in this economic malaise, with the oil sector still accounting for around 91.9 percent of total export earnings and 76.5 percent of total government revenue as of 2001.

Nigeria must now explore within its non-oil productive and economic sectors for long-term revenue sources that might assist transform its economy and meet the demands of its citizens. Prof. Okonjo-Iweala, former Finance Minister and Coordinating Minister of the Economy, stated, “Though the drop in oil prices was a serious challenge, it was also an opportunity for the country to refocus efforts towards non-oil sectors in preparation for a future with less oil revenue.” This emphasises the need for enhanced domestic revenue mobilisation from non-oil sources.

The expanding corpus of literature has revealed plausible links between the non-oil industry and Nigerian economic growth; however, the lack of empirical evidence on the scale of non-oil revenue’s contribution to government revenue and growth prompted this study.

The study’s goal is to determine the influence of non-oil revenue on the economy’s government revenue and Gross Domestic Product (GDP), as well as how much it contributes to both. It will also look into the factors contributing to the non-oil sector’s current low performance.

STATEMENT OF THE PROBLEM

Over the years, the government has earned more than half of its revenue from the oil sector, up to almost 85%, at the expense of the non-oil economy.

These oil revenues are not only significant, but also fickle, causing the amount of government programs to change proportionally. From 1972 to 1975, government spending increased from 8.4% to 22.6% of GDP; by 1978, it had fallen back to 14.2% of the economy.

This unpredictability has resulted in widespread fiscal indiscipline, high levels of corruption, dishonesty, and a lack of transparency in the government, making it difficult to develop and process non-oil sectors.

The government’s ability to spend money wisely and limit corruption has likewise been a source of debate rather than clear action.

Despite the huge revenues obtained from internal and external crude product sales, the influence on Nigeria’s total revenue and economic growth in terms of increasing productivity in other sectors remains uncertain.

It has also become increasingly difficult to ensure the adequacy and security of future oil revenue flows due to the complexity and ever-changing nature of the oil market.

The ongoing underperformance of the non-oil sector, as well as the fragility of the external sector, necessitate an immediate reassessment of the drive and content of our development policies, as well as our commitments to their implementation.

Existing literature has identified a number of factors as being responsible for Nigeria’s poor economic performance, with the most serious consequences being the continued over-reliance on the fortunes of the oil sector and failed attempts to achieve any meaningful economic diversification into the non-oil productive sector.

The nation’s overreliance on the now-dwindling oil sector, as well as the non-oil sector’s low contribution to revenue and growth, is concerning. Many previous governments’ policy formulations and plans to strengthen the non-oil industry and generate a broader revenue base have been ineffective.

This has been attributed to inadequate policy implementation, insufficient money, a lack of political will, and, of course, the ongoing idea that oil revenue is guaranteed.

Given the foregoing, the purpose of this study, among other things, is to assess the contribution of non-oil revenue to overall revenue and economic growth.

Most empirical studies had centered around the impact of oil revenue on economic growth and development and impact of non-oil on economic growth. However, the purpose of this study is to assess the influence of non-oil revenue on government revenue and the subsequent effect on growth.