Diversification Of The Nigerian Revenue Base; Contribution Of The Non Oil Sector

Project and Seminar Material for Economics

Diversification Of The Nigerian Revenue Base; Contribution Of The Non Oil Sector

Chapter One


Background to the Study

The spate of growth of any economy depends largely on resource mobilization. Such growth however is propelled by the amount of revenue generated by the country to meet its stated objectives. For every economic entity Nigeria inclusive, revenue generation amongst other things is directed towards meeting the basic social and infrastructural needs of its citizenry and to maintain a sustained growth. Prior to the 1970‟s, revenue generation in Nigeria was largely dependent on non oil products such as agriculture and mineral resources. Foreign exchange was earned from the sale of different crops such as cocoa, rubber, coffee, cotton, palm produce, groundnut, etc. Non-oil export accounted for over 74 percent of total revenue earned by the country while oil revenue accounted for the balance of 26%. However, with the discovery of crude oil especially the oil boom of 1970s, fundamental changes were experienced in the structure of the Nigerian economy. Nigeria is a country believed to be well endowed in human and natural resources, yet the focus of government since independence has been more on crude oil exploration and exportation to the detriment of other economic activities that could bring in the much desired foreign exchange earnings.

Consequently by 1985, the contribution of oil revenue to total revenue earned by the country increased to 73 percent while the contribution of non-oil revenue to total revenue dropped to 23 percent. In 2000, oil and gas export accounted for more than 98% of export and about 83% of Federal Government Revenue (Odularu, 2008). Prior to the first oil price shock of 1974, oil has annually produced over 90% of Nigeria‟s export income from 1970 to 1999, oil generated almost $231 billion in rents for the Nigeria economy and these rents have constituted between 21% and 48% of Gross Domestic Product, but yet these rents have failed to raise Nigeria‟s per capital income and done little to reduced poverty. Worst still is the fact that the phenomenal improvements in the contribution of the oil sector only but marked the beginning of the dismal performance of the non-oil sector.

No doubt that oil revenue has contributed substantially to revenue generation and growth of Nigeria‟s economy; however Nigeria‟s overdependence on the oil sector and the urgent need for economic diversification has become of paramount concern to researchers and non-researchers alike (Sanusi, 2003). He reiterated that central to Nigeria‟s Structural Adjustment Program adoption in 1986 was the need to move the nation‟s dependence away from oil revenue to a more enhanced productive macroeconomic environment. He however regrets that more than 15years after there has not been any perceptible improvement in this economic malaise, as the oil sector still contributed about 91.9 per cent to total export earnings and 76.5 per cent of total government revenue as at 2001. It has become expedient that Nigeria look inwards into its non-oil productive and economic sector for sustainable revenue sources that can help transform its economy and meet the needs of its citizenry. This was made clear when the former Finance Minister and Coordinating Minister of the Economy Prof. Okonjo- Iweala said „„though the drop in oil prices was a serious challenge, it was also an opportunity for the country to refocus efforts towards the non-oil sectors in preparation for a future with less oil revenue”. This underscores the need for increased domestic revenue mobilization from the non-oil sector.

The growing body of literature has shown possible linkages between non-oil sector and growth of the Nigerian economy, however the dearth of empirical evidence as to the magnitude of the contribution of non- oil revenue to government revenue and growth spurred this study. The study therefore seeks to determine the impact of non-oil revenue on the Government Revenue and Gross Domestic Product (GDP) of the economy and the extent to which it contributes. It will also examine the factor responsible for the current poor performance of the non-oil sector.

Statement of Problem

Over the years the government has received annually over half of its revenue from the oil sector up to about 85% to the neglect of the non-oil sector. These oil revenues are not only large but highly volatile and causing the size of government programs to fluctuate accordingly. From 1972 to 1975, government spending rose from 8.4% to 22.6% of GDP, by 1978, it dropped back to 14.2% of the economy. This fluctuation has resulted in pervasive fiscal indiscipline, high level of corruption, dishonesty and lack of transparency in the government which has made it difficult to develop and process the non-oil sectors. Government’s ability to spend funds wisely and limit corruption has also been more of a talk shop than decisive actions. Despite the large proceeds obtained from the internal and external sale of crude product, its impact on the total revenue and economic growth of Nigeria with regards to enhancing productivity in other sectors remains questionable. It has also become increasingly difficult to guarantee the adequacy and stability of future flows in oil revenue because factors at work in the oil market are complex and ever-changing. The continued unimpressive performance of the non-oil sector and the vulnerability of the external sector thus dictate the urgent need for a reappraisal of the thrust and contents of our development policies and commitments to their implementation. Extant literature has identified various factors as being responsible for Nigeria’s poor economic performance, but of grave consequences has been the continued over reliance on the fortunes on the oil sector and the failed attempts to achieve any meaningful economic diversification into the non-oil productive sector. The over dependence of the nation on the now dwindling oil sector and the poor contribution of the non-oil sector to revenue and growth is worrisome. Many attempts by past governments in terms of policy formulations and programmes to boost the non-oil sector and create a broader revenue base have not yielded much result. This has been traced to poor implementation of policies, lack of appropriate funding, lack of political will and of course the continued belief that revenue from oil is guaranteed. It is in the light of the above that this study seeks therefore amongst other things to evaluate the contribution of non-oil revenue to total 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. This study however seeks to further evaluate the non-oil revenue impact on government revenue and the resultant effect on growth.

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