Nigeria’s Oil Dependent Economy: Any Lesson From Norway?, By Abdulhaleem Ishaq Ringim

By separating oil revenues from the government spendings, the Norwegian government ensured that people were “kept at work”, the value of labour was kept high constituting 81 per cent of the Norwegian national wealth per capita, while oil and gas only holds 4 per cent. Taxes are moderate… Prosperity in Norway is mainly a product of the efficiency and productivity of its people.

Whether Nigeria has utilised its oil wealth in a prudent manner is still a topic for national debate. However, considering how dependent the country’s economy has become on oil revenues, the shrinking of other economic and revenue generating sectors including agriculture, mining and manufacturing, and the resultant unhealthy rate of economic development, most Nigerians believe Nigeria is yet another patient infected by the debilitating “Dutch Disease”.

Today, proceeds from Nigerian oil accounts for about 70 per cent of the country’s revenue, 90 per cent of its exports and foreign exchange but constitutes less than 10 per cent of its GDP. This seriously exposes and makes economic prosperity wholly dependent on the ever volatile global oil price. In 2016, for example, Nigeria slumped into its first recession in two decades courtesy of global oil price crash from a high of about $110 per barrel to about $48 per barrel. In 2020, as well, Nigeria slumped into another recession courtesy of the COVID-19 induced fall in global oil price.

The above illustrations show how oil price volatility determines the direction of the Nigerian economy. This coupled with the lack of sustained prudent management of oil wealth over time have restricted the Nigerian economy from attaining its full potential and have rendered it fully susceptible to the renowned “resource curse”.

Prior to the discovery of oil, Nigeria ran an agrarian economy. Agriculture was the prime mover of the economy, it contributed about 64 per cent of the country’s GDP; 65-75 per cent of foreign exchange earnings and employed over 70 per cent of the Nigerian population.

Agricultural production in the country included the cultivation of local crops for domestic consumption and several cash crops for export. Nigeria was basically self-sufficient, as agriculture provided about 95 per cent of the food needs of the entire nation. Through exportation and sales taxes, agriculture powered the Nigerian economy as the major source of revenue. This revenue was used judiciously in developing other physical, social and economic infrastructure, paving the way for efficient service delivery in health, education, power supply, water supply etc. It also powered other sectors, including mining, manufacturing and even oil and gas exploration.

There have always been reminiscences of the great groundnut pyramids of Northern Nigeria (when Nigeria was the largest exporter of groundnut); the cocoa of Western Nigeria (being the second largest export) and palm kernel and oil from Eastern Nigeria.

The abundance of such crops also assured a robust manufacturing sector, with industries for the production of value-added agricultural products and a relatively high employment rate.

The search for crude oil in Nigeria started as far back as 1908 at Aromi (in present Ondo State). However, oil was not found in commercial quantities until 1956 when Shell discovered massive deposits in Oloibiri of present day Delta State.

This marked a major u-turn in in the operations of the Nigerian economy. From a national revenue contribution of just 0.08 per cent in 1958 when Nigeria shipped out its first cargo of oil, and with the discovery of other oil fields and the exploration/production activities of many other international oil companies who joined in production, revenue from oil rose through a 1 per cent revenue contribution in 1960 to more than 70 per cent by 1975, replacing agriculture as the major source of national revenue and foreign exchange. Nigeria officially became a mono-product and rentier economy, which neglected agriculture, industrialisation, etc.

It is widely accepted by many in the country that oil revenues were largely mismanaged with special reference to the 1970s.

After the civil war, oil production and exportation surged, as Nigeria discovered massive onshore and offshore crude oil deposits. As a result, Nigeria joined the Organisation of Petroleum Exporting Countries (OPEC) in 1971. The world experienced a boom in oil price in the 1970s and Nigeria as one of world’s largest oil producers benefited immensely from this (Nigeria’s earnings from crude exports skyrocketed by over 500 per cent within 1970-1974).

… the Norwegian view of oil and the fortunes that come along with it was entirely different from how Nigeria viewed it. In 1983, by viewing oil revenue not as a source for immediate squandering but as a “transformation of wealth, from a natural resource to financial wealth”…the Norwegian government suggested the establishment of a fiscal buffer…

During that time, the government, prompted by massive oil revenue inflows, embarked on extravagant spendings, especially on massive non-productive projects, which never ushered in commensurate national economic development.

For example, at a time, Nigeria ordered 20 million tons of cement for the execution of the large developmental construction projects the government had embarked on. The shipment was twice the off-loading capacity of all Nigerian ports combined and hence, the cement could not get off-loaded. Massive amounts of the cement eventually lost binding capacity and became wasted. That was just one out of many stories pertaining to the the squandering of Nigeria’s oil revenues.

However, things started to turn for the worse in the 1980s when the global oil prices declined and OPEC lowered Nigeria’s exporting quota, resulting in a decline of petroleum output and national revenue. The economy plummeted into its first recession characterised by a huge debt burden; large scale retrenchment of workers, leading to a high unemployment rate; foreign exchange shortages; inflation; etc. This led to two military coups and the subsequent Structural Adjustment Programme (SAP) instituted by the Babangida Administration.

The economy improved in the 1990s but we still did not learn from the experience of the previous decade.

Norway, like Nigeria, is also an oil producing state. Oil was first discovered in Norway in the 1960s and production started in 1971, almost a decade after Nigeria shipped out its first crude oil cargo.

However, the Norwegian view of oil and the fortunes that come along with it was entirely different from how Nigeria viewed it. In 1983, by viewing oil revenue not as a source for immediate squandering but as a “transformation of wealth, from a natural resource to financial wealth”, with consideration for the future by upholding an ethical obligation to share oil wealth with future generations, the Norwegian government suggested the establishment of a fiscal buffer; a sovereign wealth fund, to ensure that oil wealth is sustainably managed for long term benefits. They were aware of the “Dutch Disease” and were thus determined to prevent themselves from getting infected.

The Petroleum Fund (and later Government Pension Fund Global; GPFG) was established in the year 1990 and the first transfer to the fund was made in 1996. By law, all net revenues from the oil sector were to be transferred to the fund. A fiscal rule followed in 2001 to define how much of the oil saving would be spent and how much would be saved. In relation to the fiscal rule, it was agreed that for each year, only the expected real return from the fund should be utilised to cover “non-oil structural budget deficit” on the government budget and not the actual budget deficit.

This implies that since 2001, oil revenues have not been spent but transferred to the Sovereign Wealth Fund for investment. And only the expected real returns from the investment, which is four per cent per annum, is allowed to be transferred back to the government budget to cover only non-oil structural budget deficit and not the actual budget deficit.

Such a policy has ensured the absolute separation of oil revenues from government spendings and budgets and seen to the fact that Norway does not spend too much money too fast. This has prevented the emergence of an overheated economy, kept prices and wages at a moderate level and ensured that labour does not move from the competitive and tradable part of the economy to the “sheltered” service sector, hence keeping productivity very high.

The policy also helped in insulating the government budget from the effects of the volatility of global oil price – the boom and burst cycle.

And although international oil companies dominated the production, the Norwegian government still held a significant stake and taxed the IOCs at a high rate of 78 per cent.

While Norway’s Sovereign Wealth Fund (The GPFG) is valued at more than $1 trillion (2017) due to a fiscal rule that obligated saving and investing oil revenues, of which only financial returns from the investment could be used by the government, however Nigeria’s imprudently managed ECA and SWF stand at $72 million and $1.5 billion respectively.

By separating oil revenues from the government spendings, the Norwegian government ensured that people were “kept at work”, the value of labour was kept high constituting 81 per cent of the Norwegian national wealth per capita, while oil and gas only holds 4 per cent. Taxes are moderate (sometimes considered relatively high for an oil producing state). Prosperity in Norway is mainly a product of the efficiency and productivity of its people. Norway’s employment rate remains one of the highest in the world, exceeding that of the Eurozone and even the United States.

Norway also run a strong public sector with relatively higher tax rates and also a large and competitive private sector due to its good business environment, ranking ninth in the World Bank ease of doing business ranking, first in the Legatum Prosperity ranking, seventh in Transparency International’s CPI, and eleventh in the World Economic Forum’s Global Competitiveness Index.

Unfortunately, it is a different case in Nigeria as oil revenues remain the major source of funds for budget servicing (government expenditure) and global oil price determines the direction of Nigeria’s economic growth at every given time.

However, during Obasanjo’s administration around 2004, Ngozi Okonjo Iweala, the then Finance Minister and now Director General of the World Trade Organisation developed an oil-price-based fiscal rule that tried to create a space for oil revenue savings. The fiscal rule aimed at delinking the oil price benchmark, on which budgets are formed, from the global market price. For example, the government could peg the benchmark at $140 per barrel during a period where the market price is at $147, the difference of $7 would then be saved.

The savings were held in an account called the Excess Crude Account (ECA) and the government, through this fiscal rule, was able to save $22 billion from 2004 to 2008. It is due to this saving that Nigeria was able to withstand the 2008 Global Financial Crisis without plunging into recession, as the government was able to administer a fiscal stimulus with 4.5 per cent of our 2009 GDP using the ECA savings.

However, the savings continued getting depleted even after the effects of the crisis had warded off. The savings went down to $4 billion in 2011, out of which $1 billion was set aside for the newly created Sovereign Wealth Fund. The ECA saving surged up to $9 billion by 2013.

Nigerian governors, most of who are ministers in today’s administration, had always been opponents of such fiscal rules and they insisted on sharing the proceeds of the revenue on the basis of the country’s sharing formula, as prescribed by the Constitution. They mounted pressure until the ECA was depleted down to $2.3 billion in 2014.

Consequently, oil prices plummeted and Nigeria sunk into its first recession in two decades in 2016, courtesy of lack of prudent fiscal management of oil funds.

While Norway’s Sovereign Wealth Fund (The GPFG) is valued at more than $1 trillion (2017) due to a fiscal rule that obligated saving and investing oil revenues, of which only financial returns from the investment could be used by the government, however Nigeria’s imprudently managed ECA and SWF stand at $72 million and $1.5 billion respectively.

The current realities of Nigeria’s economy are far from pleasant. It has survived two recessions within the span of five years and is currently fairing with a 16.47 per cent inflation rate, a $0.0026 exchange rate, 27-30 per cent unemployment rate, N42 trillion debt stock, 83 per cent debt service-to-revenue ratio (it was 99 per cent in 2020 Q1) and a GDP growth of 0.11 per cent by Q4 2020, with a 1.92 per cent contraction in real terms.

Today, the global oil price has started appreciating, and surpassing the 2021 benchmark for the Nigerian Budget, which makes one ponder this question: “Are there lessons we could still learn from Norway at this stage”?

Abdulhaleem Ishaq Ringim, a political and public affairs analyst, writes from Zaria and can be reached through haleemabdul1999@gmail.com