Characterised by a vibrant, tropical topography, Nigeria once boasted a diverse, prosperous and self-sufficient agricultural sector, famed for its palm oil and cocoa production. Since the discovery and rapid exploitation of the country’s hydrocarbon reserves, however, the balance of Nigeria’s economy has become increasingly tilted in favour of this more volatile commodity. However, the recent dive in global oil prices, and a lack of investment in efficient downstream activities, has made it more vital than ever that Nigeria’s journey towards economic diversification be rapidly realised.

With petroleum accounting for 90% of the country’s export revenue, and the biggest importer of Nigerian crude, the US, being transformed from customer to competitor by the discovery of shale gas reserves, concern is rising in the Nigerian capital of Abuja. The manager of the Dubai-based Duet Frontier fund, Hedi Ben-Mlouka, says that Nigeria can expect to be badly hit by the plummeting price of crude oil. “The country lacks a large fiscal buffer from which to maintain spending and run counter-cyclical policies," he says.

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Step off the gas

One method of improving Nigeria’s fiscal buffer and ensuring economic diversity is through the attraction of inward FDI. In this respect, the country has been improving in recent years. It received $10.31bn in the first 11 months of 2014, a 79% increase on 2013 levels, according to greenfield investment monitor fDi Markets. Vitally, $6.69bn of this was invested in sectors other than oil and gas.

In a 2014 recalculation of Nigeria's GDP – with the base year updated from 1990 to 2010 and an increasing number of industries included in the calculation – the country saw the share of its income accounted for by the hydrocarbons fall, from 37% to less than 16%, according to research by Deutsche Bank. 

In an interview with fDi Magazine, Wange Dia, assistant director of overseas and domestic operations at the Nigerian Investment Promotion Commission, welcomed this change. “Nigeria is almost wholly dependent upon oil. This is the right time for Nigeria to rethink and take a look at other sectors of the economy," she says, adding that FDI can play an important role in realising this. “There is no way you can diversify without looking at FDI. It provides the technical know-how, external materials and crucially the job creation.” 

Ms Dia points to a number of ongoing initiatives aimed at encouraging investors, most notably the tax benefits offered to those operating in ‘pioneer status’ industries. “It enables companies to get past the initial stage when they are trying to effectively capitalise," she says. Initiatives such as this have added to Nigeria’s already considerable appeal as a lucrative prospect for global investors. 

Other options

While praising existing efforts towards increasing economic diversification in Nigeria, Ms Dia says that there was much more that could be achieved. “The hydrocarbon issue has overshadowed everything; there is a lack of attention given to industries outside the oil industry,” she says.

With arable land covering more than 79% of Nigeria, and agriculture still the country’s biggest employer, the west African country could once again be self-sufficient in this department. However, much of its existing agriculture can be classified as low-level subsistence, with poor levels of industrialisation resulting in sub-par production levels. Investors also appear hesitant to engage in rural ventures that are a long distance from existing infrastructure and power supplies.

An alternative source of economic diversification is Nigeria’s burgeoning services sector, which Ms Dia says is “exceedingly important” to develop in order to achieve “high levels of technology and technical penetration”. She points to South Africa as a possible model to emulate, following the country's successful transition from a mainly commodity-driven economy to a knowledge-based one.

Challenges ahead

Although Nigeria is proactive in improving business conditions for foreign firms, investor confidence continues to be undermined by a number of key issues. Ms Dia highlights the country's unreliable power supply as a severe handicap when attracting global investors. “There may indeed be adequate levels of power generation in some areas but the capacity for transmission is not there," she says. 

Poor infrastructure was highlighted, alongside opaque bureaucracy, in the World Bank’s most recent Doing Business index, which saw Nigeria rise five places up the ranking, but still placed it at the lower end of the ranking, at 170th in the world.

Rory Lamrock, an analyst at political risk consultancy AKE Intelligence, elaborates on the challenges posed by Nigeria's poor infrastructure. “Sometimes it’s enough of a hassle to put companies off, particularly if it is a small or medium-sized firm, which does not have the resources of a huge contractor,” he says, adding that another problem is in implementing any meaningful reform in the business sector. “It is very difficult when a country has such deep-rooted corruption to really go about tackling it in a concerted way that would improve the ease of doing business,” he says.

These are valid concerns, which to date have been somewhat mitigated by the dominance of Nigeria's hydrocarbon sector and what Mr Lamrock terms as the oil industry’s “high appetite for risk”. With investment in the oil and gas industry declining, Nigeria will have to broaden its appeal if it hopes to maintain the levels of investment that have characterised its transformation into Africa’s largest economy.

If oil prices continue to plunge and the advent of shale exploitation continues, Nigeria’s economic policy, and more specifically FDI policy, is likely to obtain ever greater scrutiny in the run up to the 2015 general elections.