The Nigeria Extractive Industries Transparency Initiative (NEITI) has called on the government to protect the economy from oil price volatility.
A statement by Orji Ogbonnaya, NEITI’s Director of Communications and Advocacy, noted that this can be achieved 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, the organisation urged the government to adopt sustainable strategies for robust fiscal cover for the Nigerian economy during periods of oil price shocks.
“Price volatility is a constant feature of the oil market, exposing oil-dependent countries like Nigeria to regular economic crises when oil prices tumble,” NEITI said.
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.
On 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.
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 34 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.
According to the paper, 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.
NEITI noted that though dependence on oil is reducing, oil still accounts for about 50 per cent of government revenues and over 80 per cent 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 protect 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”. While Nigeria has an oil savings fund, NEITI stated that the savings are too small to serve its intended purposes.
However, the paper 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 per cent 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 per cent to 40 per cent 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.
On the second strategy, NEITI 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 in the economic structure should be intensified, adding 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. Investments in physical and human infrastructure should be increased so as to reduce the cost of doing business, it added.
The third strategy, NEITI noted, is to get more from the oil and gas sector in other to aid the development of other revenue and export streams. The organization said “Blocking leakages and maximising opportunities in the sector will help in increasing government revenues and the contribution of the sector to national productivity”.
This, it argued, can be achieved through elimination of crude oil and refined product theft, full deregulation of the downstream sector and boosting of gas production and utilisation. Other recommendations, it said, include fast-tracking the passage of the Petroleum Industry Bill (PIB), institutionalising 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.