Oil, naira… 5 reasons why Nigeria lost its place as Africa’s largest economy

Nigeria can no longer boast to be the biggest economy on the African continent, as it lost the spot to South Africa after the naira plunged to new lows.

With a gross domestic product (GDP) of $296 billion, according to Bloomberg and the International Monetary Fund (IMF), Nigeria dropped to become Africa’s second largest economy, after holding the position for two consecutive years.consecutively.

Here are five reasons why Nigeria lost its place:

CRUDE OIL CRASH

According to Lukman Otunuga, research analyst at FXTM, the crash in oil prices on the international market is the prime reason Nigeria, an oil-dependent nation, lost its place to South Africa.

“The extended periods of depressed oil prices and persistent global uncertainty have caused the world’s previous largest economy in Africa known as Nigeria to lose its title to South Africa,” Otunuga said in a note to TheCable.

Oil prices have fallen by over 65 percent since 2014, having a direct toll on the Nigerian economy.

NAIRA ‘FLOATING’ DEVALUATION

South Africa’s economy regained the position of Africa’s largest in dollar terms, due to the crash of the naira against the dollar. As the naira fell against the dollar, the South African rand — on the other hand — appreciated against the dollar.

In 2016 alone, the rand has appreciated by over 10 percent against the dollar, while the naira has fallen by over 40 percent.

Analysts believe that if the naira was floated earlier in the life of President Muhammadu Buhari’s administration, the over 40 percent drop from 197 to 310 against the dollar could have been avoided.

INFLATION

In 2016 alone, NBS figures show that inflation in Nigeria has spiked by over 71 percent, moving from 9.6 percent in January to 16.5 percent by June.

As the inflation spiked, some businesses went down and many jobs were lost.

According to NBS, over 1.5 million people have come into the unemployment bracket in the past year. As inflation spiked, Nigeria lost some economic activity, which hitherto kept the economy robust.

GOODLUCK JONATHAN AND FOREX SCARCITY

Foreign exchange still remains a scarce commodity, following a number of questionable decisions from the Central Bank of Nigeria (CBN) monetary policy committee.

The naira was pegged at 197/$1 for 16 months without reflecting the reality in the falling crude oil price.

In 2008, when the global economic crisis was biting hard, Nigeria still maintained a GDP growth of 6.3 percent, due to fiscal buffer (in foreign reserves and excess crude account), saved from the Obasanjo days.

If the Goodluck Jonathan administration saved as much as the Obasanjo days, the 2014/2015 crude oil crash would also have had little or no effect on the Nigerian economy. Forex scarcity would not have surfaced at all.

SLOW POLICY DECISION AND DIVERSIFICATION

President Buhari said before and after his election into office that he was going to diversify the Nigerian economy away from oil.

He seems to remain resolute to his plans, by broadening the tax base through the Federal Inland Revenue Service (FIRS), while pursuing agriculture and mining.

But like Ngozi Okonjo-Iweala, former minister of finance, said, Nigeria and other African countries are lazy about the diversification talk, failing to recognise that it takes decades to fully diversify.

With slow diversification in trying times, coupled with slow economic decisions, the economic fall seemed inevitable.

According to Otunuga, “although this new development may dampen sentiment, it should be kept in mind that Nigeria is in an ongoing quest to diversifying away from being heavily export reliant.

“This year, 2016, has been a challenge with the nation descending into a technical recession while inflation skyrocketed to shocking levels.  Steps have already been taken to jump-start economic growth in the long run with optimism that the nation could reclaim its previous title as the largest economy in Africa.”