Nigeria is Africa’s biggest oil producer. But the lack of operational oil refineries has left the industry in crisis, forcing the country to import fuel. Economists say the next government needs to diversify the economy.

Nigeria is a giant in terms of population size and economic power. Around 220 million people live in the West African country, and by 2050 it is estimated that there will be 375 million.

The state of Lagos alone has a bigger economic output than Kenya. Moreover, Nigeria generates a larger gross domestic product (GDP) than all other West African states combined.

Rising poverty and social unrest

Nigeria’s economic machinery is driven by crude oil, which is found in massive deposits in the Niger Delta. But despite the natural wealth, the economy is struggling. Economic growth is lower than population growth; experts warn of rising poverty and social unrest.

The reasons for this downward trend are evident. Oil production has fallen to an all-time low. According to Nigerian economist Afolabi Olowookere, whom The Guardian Nigeria cited, the oil sector’s share of government revenue dropped from nearly 47% in 2017 to a meager 7.4% in the first half of 2022.

Nigeria has failed to benefit from the global oil price boom. As a result, the oil sector’s share of Nigeria’s GDP has also virtually halved since 2010, from more than 13% to just under 6%.

Crude producer but refined oil importer

Nigeria’s core problem is that it relies almost entirely on expensive imports to meet its gasoline needs — despite being Africa’s largest oil and gas producer. Nigeria has four state-owned refineries, but they have become dilapidated and idle due to mismanagement.

The government pours billions of dollars into fuel subsidies yearly to cushion the social consequences. However, consumers then feels the costs at the pump. This has even led to the smuggling of cheaper gasoline from neighboring countries. 

Muazu Magaji, an expert on oil resources in Lagos, cites the lack of strategy on the part of politicians as a crucial element for this desolate economic situation. “It’s a fact that the government itself has not developed a vision for energy security,” Magaji told DW, adding that this applies not only to the current government but also to previous regimes.

Rising fuel subsidies

A few days ago, the chief executive officer of the state oil company Nigerian National Petroleum Company (NNPC), Mele Kyari, said Nigeria would require some $9.1 billion (€8.5 billion) to meet its fuel subsidy needs this year.

The skyrocketing cost of fuel subsidies — coupled with the economic losses from falling oil prices — recently led Nigeria to fund its budget only through an emergency loan from the International Monetary Fund (IMF).

With the World Bank’s financial injections, $5 billion have flowed into Nigeria since the beginning of the COVID-19 pandemic to keep Africa’s largest economy from collapsing.

Shrinking foreign exchange reserves

But the financial challenges are coming back with a vengeance. In 2018, the IMF appealed to Nigeria to curb its rising debt and diversify its economy to avoid a crisis. This becomes abundantly clear when looking at the oil sector. Daily production of 1.8 million barrels per day before the pandemic has plummeted to around one million.

The country’s foreign exchange reserves are also in dangerous waters. They continue to shrink with each passing year. International financial experts warn that the country’s naira currency could be devalued if the funds fall below the $30 billion mark.

The World Bank’s latest country study leaves no doubt about how serious the situation is. “Nigeria is in a difficult economic situation that continues to deteriorate,” World Bank experts wrote in the study “Nigeria’s Choice,” published in December.

Bleak economic outlook

However, with falling tax revenues, rising fuel subsidy costs, and a decline in oil prices as oil production decreases, the choices are somewhat limited. Add to that an inflation rate of more than 20%, and the economic outlook does not look positive.

Transparency International’s ranking shows how corruption continues to cripple Nigeria’s economic activity. It is ranked 154 out of  180 countries surveyed in 2021, significantly deteriorating from position 144 in 2018.

Much of the oil and fuel shortage is due to theft. Government officials such as Finance Minister Zainab Ahmed quite officially explain part of the gasoline and diesel shortages to rampant fuel theft. In addition, says Ahmed, there are sabotage actions on pipelines in the Niger Delta.

Hope for new mega-refinery

Just outside Lagos, the giant Dangote refinery is under construction. Once up and running, it will reliably supply Nigeria with gasoline and diesel. The refinery owner is billionaire Aliko Dangote, considered the wealthiest man in Africa. However, completion has been delayed for years.

With the investment by the private sector, it is hoped to create an alternative to state-owned refineries, Magaji says. The combined capacity of the four refineries is 450,000 barrels per day, compared to 650,000 barrels per day for the Dangote refinery.

Experts have long called for Nigeria to move away from oil dependence. “The policy of diversification has unfortunately been going on for four or five decades,” Magaji said. “We have talked about great revolutions, wanted to promote the mining sector and develop agriculture into an important branch, but we have not succeeded.”

Promoting agriculture

According to Magaji, President Muhammadu Buhari has indeed focused more on agricultural development. “We have gone from being a net importer of rice, one of the largest in the world, to being self-sufficient,” Magaji said. “But it’s still not enough to export,” he added.

Nigeria will hold its presidential election on February 25, when the next government finally has the chance to push ahead with the long-demanded economic diversification plan.