The Nigeria Extractive Industries Transparency Initiative (NEITI) has expressed worries over the country’s frequent struggles during periods of crude oil price volatility in the international market.
With two recent downturns in 2016 and early this year, NEITI has urged the Federal Government to insulate the economy by weaning Nigeria off its unhealthy dependence on oil which accounts for the bulk of its revenues and foreign exchange earnings.
NEITI called for a saving fund for the country that reflects the volume of revenue from extractive sector and the size of the economy.
The agency in its latest policy brief, titled: “Insulating Nigeria from Perennial Oil Price Volatility”, urged the government to adopt sustainable strategies for robust fiscal cover for the Nigerian economy during periods of cyclical oil price shocks.
According to NEITI, “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 stated 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”.
NEITI in the 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.
The report observed that the pandemic has put Nigeria’s public finances, and by extension its economy, in dire straits.
“The 2019 Corona virus 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”.
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 delusion that the country will continue to be rich from its natural resources. Then overtime, 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 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 eight oil price shocks in thirty four years. Four 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 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 is too small to serve its intended purposes.
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 constitutional amendment and the scrapping of ECA.
The policy brief also put forward a third strategy which is to get more from the oil and gas sector in other to aid 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 added.
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