The Nigeria Extractive Industries Transparency Initiative (NEITI) has called on the government to insulate the economy from the perennial oil price volatility by weaning Nigeria off its unhealthy dependence on oil which accounts for the bulk of its revenues and foreign exchange earnings.
NEITI made the call in its latest policy brief, titled: “Insulating Nigeria from Perennial Oil Price Volatility”. In the brief, NEITI urged the government to adopt sustainable strategies for robust fiscal cover for the Nigerian economy during periods of cyclical oil price shocks.
NEITI stated that “Price volatility is a constant feature of the oil market, exposing oil-dependent countries like Nigeria to regular economic crises when oil prices tumble”. It noted that though, price slumps have always been accompanied by severe pains that linger beyond the price crash, “The virus will eventually be tamed. Oil prices will go up again. So the pain of the moment shall pass. But the next slump in oil prices is not a matter of if but when”.
The latest NEITI policy brief examined the impacts of COVID-19 on the nation’s economy, explored inherent dangers in natural resources dependence and recommended ways through which Nigeria can be insulated from this predictable but perennial challenge.
Examining the impacts of COVID -19, the brief noted that the pandemic has put Nigeria’s public finances and by extension its economy, in dire straits. “The 2019 coronavirus disease has thrown most countries into the throes of sudden and multiple crises…exposed the inherent economic vulnerabilities of resource-dependent countries like Nigeria…This is largely due to the sudden slump in oil prices, caused by the collapse in oil demand as countries imposed lockdowns in a bid to contain the health crisis”, the brief stated.
On predicaments being faced by resource-dependent nations, the paper described it as “sequence of delusions, dependencies and distortions. First, the onset of resource windfall creates the delusion that the country will continue to be rich from its natural resources. Then over time, the country becomes dangerously dependent on revenues from mineral resources due to this delusion, and also because resource rents are relatively easier to earn and spend”.
The paper further explained that this dependence ultimately creates severe distortions to the economy where productive sectors become moribund as they are crowded out by the extractive sector. It noted that as an inevitable consequence, any disturbance in the flow of revenues from such resources produces an automatic threat to the economy of such a resource-dependent country.
A trend analysis of oil price shocks by the policy brief covering May 1987 to May 2020 showed that the global economy had witnessed about 8 oil price shocks in thirty-four years. 4 of these crises brought about oil price spikes namely; the Gulf War in 1990, War on Terror/ Venezuelan crises in 2005, Global economic expansion and OPEC Plus Agreement in 2018 and 2019.
On the other hand, there was a global price fall during the East Asian Financial Crisis in 1998, Global financial crisis in 2008 and 2009, shale oil production period in 2014 and recently during the Covid-19 Lockdowns in 2020.
Further analysis of total federation revenue against oil prices revealed a very strong close relationship between oil prices and government revenue within the period under review. Thus, as oil prices rise, the federation revenue also shots up; and as oil prices fall, federation revenue dwindles.
A look at oil revenue as a percentage of total federation revenue showed that from 1981 to 2014, oil revenue consistently accounted for about 65% to 85% of total federation revenue. “It is only in recent years (2015 – 2018) that oil revenue was below 60% of the total revenue. And this can be attributed to low oil prices and increased efforts to boost non-oil revenue”, NEITI stated.
Further analysis also showed that revenue from oil export has consistently contributed over 90% of total exports revenue, indicating the dominance of the oil sector in the generation of foreign exchange.
NEITI noted that though dependence on oil is reducing, oil still accounts for about 50% of government revenues and over 80% of exports and foreign earnings which makes Nigeria highly vulnerable to oil price shocks. The policy brief advised that “Beyond surviving the latest oil price slump largely occasioned by COVID-19, Nigeria needs a sustainable strategy for coping with future oil price shocks”.
The policy brief listed three important pathways that will insulate Nigeria from this predictable but perennial challenge. First is for the country to “Maintain a robust ‘rainy day’ fund, the size of which should reflect not only the volume of revenues from mineral resources but also the size of the national economy”.
This savings fund is supposed to help Nigeria smoothen spending, form a hedge against the cyclical volatility of oil prices and keep part of the accrued benefits for the future generation among other reasons. While Nigeria has an oil savings fund, NEITI stated that the savings are too small to serve its intended purposes.
The paper, however, identified challenges towards Nigeria achieving and maintaining a healthy oil savings fund. The constraints are constitutional and the difficulty in achieving centralised savings in a regime of fiscal federalism.
NEITI, therefore, recommends that Section 162 (1) of the 1999 Constitution should be amended to mandatorily allow for part of the oil earnings to be saved; that the 0.5% stabilisation fund and the Excess Crude Account (ECA) be abolished and the balances in the accounts transferred to the NSIA; the Oil Price-based Fiscal Rule (OPFR) where revenue in excess of oil price benchmark is saved should be abolished and replaced with mandatory savings of a percentage of daily oil production. “This will remove the constant political jousting about oil benchmark price and quantity”, the policy brief advised.
NEITI also recommended that proceeds from the percentage of daily oil production should be transferred to the NSIA and the funds invested in convertible instruments while the NSIA’s stabilisation fund should be increased from 20% to 40% and dividends from its earnings shared every year.
According to the brief, increasing NSIA’s stabilisation fund and sharing the dividends from investments will give comfort to the states and LGs to support the constitutional amendment and the scrapping of ECA.
The second strategy recommended by the policy brief is that Nigeria should wean itself off its dependence on oil revenue. The policy brief acknowledged the efforts of government in this direction but noted that a lot more needs to be done in order to boost non-oil revenue and export to improve foreign exchange earnings.
Increasing revenues from taxes and tariffs and boosting raw and processed agricultural and solid minerals exports are some of the strategies the policy brief put forward that could help Nigeria diversify its earnings from exports.
NEITI also pointed out that the present efforts by the Nigerian government to correct the distortions to the economic structure should be intensified.
It also adds that macro-economic stability should be maintained, ease of doing business improved with incentives and reforms put in place to further attract foreign and local investors in areas where Nigeria has comparative advantage and investments in physical and human infrastructure should be increased so as to reduce the cost of doing business.
The policy brief also put forward a third strategy which is to get more from the oil and gas sector in other to aid the development of other revenue and export streams. “Blocking leakages and maximising opportunities in the sector will help in increasing government revenues and the contribution of the sector to national productivity”.
This can be achieved through the following: elimination of crude oil and refined product theft, fully deregulate the downstream sector and boosting gas production and utilisation.
Other recommendations include: fast-tracking the passage of the Petroleum Industry Bill (PIB), institutionalise transparency in the oil and gas sector as well as systematic and proactive disclosures in areas of contracts, productions, revenues, commodity trading, beneficial ownership, bid rounds and production costs, among others.
NEITI’s policy brief also recommended for a level-playing field for all operators, including Nigeria National Petroleum Corporation (NNPC) and a more deliberate strategy for boosting local refining capacity so as to reduce the pressure on external reserves from the importation of refined products while positioning Nigeria to meet the refining needs of the Africa sub-region.
The publication welcomed measures already taken by the Federal Government to address the economic impact of COVID-19. The government had revised the 2020 budget, cut some aspects of the capital and recurrent expenditures, slashed revenue projections and production benchmarks; secured a $3.4 billion emergency facility from the International Monetary Fund (IMF) and augmented federation allocation with $150m which was withdrawn from the stabilization fund of the Nigerian Sovereign Investment Authority (NSIA).
Government has also removed subsidy on petroleum products and adjusted the exchange rate from N305 for $1 to N360 for $1 with N2.3trillion economic sustainability plan put in place to cushion the various economic dimensions of the pandemic.
The removal of subsidy or under-recovery on petrol, which cost the country about N9.8 trillion between 2006 and 2018, will ensure savings and availability of scarce resources for more impactful areas. It will also help curb the corruption and smuggling associated with petroleum subsidies.
NEITI commended all the measures so far put in place by government as very important steps towards minimizing the economic impact of COVID-19 crisis. The transparency agency, however, reiterated the need for Nigeria to “Look beyond surviving this latest episode of a lingering malaise”.
According to NEITI, “It is important to use this crisis to significantly reduce Nigeria’s vulnerability to regular oil price shocks and also emplace a framework for robust fiscal cover”.
The NEITI Policy Brief is one of the agency’s policy and advocacy instruments, designed to focus the attention of policymakers and citizens on important issues in the extractive sector, especially those requiring urgent attention.