The Nigerian economy’s dependence on oil export earnings is the country’s most poorly kept secret. Since the discovery of crude oil in commercial quantities in Oloibiri in 1956, the economy’s growth pattern has mirrored the global market for oil prices.
Between October 1973 and march 1974, when OPEC announced an oil embargo against a number of western countries for their support for Israel during the Six-Day War, oil prices reached US$12 per barrel (pb) from US$3pb. With oil accounting for a growing share of export earnings and government revenue, the country’s problem at this point was not “money but how to spend it”.
By 1979, crude oil prices nudged US$39.50pb as panic over the consequence of the new theocracy in Iran for the oil market drove prices beyond legitimate concerns over the supply implications of the Iranian Revolution.
By 1980, however, the new Nigerian narrative was of “austerity”, as oil prices fell for two decades thereafter. This was also the period when the economy was reported by a then president as being beyond the pale of economic logic.
The 1990 oil price shock was much shorter-lived. It lasted for as long as its main trigger: the Iraqi invasion of Kuwait. By 2003, however, oil prices first rose above US$30pb (from an average of around US$25pb in the preceding two decades); went through a succession of increases, only to peak at US$147.30pb in July of 2008.
Until 2003, the Nigerian economy’s boom and burst cycles was predictable using the oil price outlook. But for the first time, a Nigerian government took steps to break this cycle of dependence. Through a slew of new legislations and rule changes, including the fiscal stability act and the oil price-based fiscal rule, the government then sought to save any excess in the oil price above a given budget benchmark in a rainy day fund – the Excess Crude Account (ECA).
Thus, not only did the current government inherit an ECA with a healthy balance (US$60bn), it also benefitted from its own energy crisis. Barring the dip in the market between July 2008 and December of the same year, oil prices have remained elevated since 2003. Indeed, as at July this year, it was selling for US$115pb.
The new “austerity measures” described by the Coordinating Minister for the Economy responds to the bottom falling out of the oil market. Over the four months since July, oil price has fallen by about 30 per cent.
The immediate economic consequences of this development are obvious. Given the economy’s dependence on oil earnings, falling prices would hurt the current account balance (largely the difference between our earnings on exports and spending on imports), reduce accretions to the external reserve (from which the central bank spends in support of the naira), and by pushing up import costs (we are an import-dependent economy) drive up inflation.
Arguably, the biggest impact of lower oil earnings is on government’s ability to meet its financial obligations. At this point, some may point out that if the rhetoric of the Jonathan administration’s “transformation agenda” had any element of truth in it, we ought not to be as vulnerable to external shocks as have been other Nigerian administrations.
But this would be to cavil pointlessly. For the strongest point of the administration has been two-fold: the ease with which it has seen its way through the savings from the 2003 reforms to the public expenditure management framework; and its failure to save from the high oil prices that were a feature of much of the last five years.
Given this scenario, the current crisis was one foretold. The bigger worry is how well this government may manage it. We have highlighted, in a lengthy article, some of the bad habits governments (federal and states) need to purge themselves of to lessen the effect of the current hardship. Read it here.