Oil price crash and Nigeria: Why this time is different

This simple story posits that Nigeria has built up strength and resilience from sustained reforms and structural transformation and that because of this, it is being able to withstand the current oil price shock better than it did the previous ones. One could recall earlier crashes in oil price in 1986 and 2008.

Episodes of oil price crash
Following the 1973 Arab-Israeli war, there was a period of sustained price increase until 1980 when there was crude oil glut in the international market. Prices started to decline gradually from almost USD40 in 1980, with a crash to below USD10 in 1986. About 22 years later, the global economic and financial crisis which started with the sub-prime mortgage crisis in the United States in 2008 resulted in credit crunch, declining asset values and a decrease in economic activities and output, prominently in the advanced economies of the world. The decline in economic activities resulted in reduced demand for oil and prices fell from USD147 in July 2008 to below USD45 by December 2008.

Since the last quarter of 2014, there has been a decline in demand for oil as a result of: slowdown in economic activity in China, India and Europe; increased supply of oil with higher exploration levels, including shale oil and gas exploration in the United States, Canada and other countries, and the theory of geopolitical manipulations by the West in reaction to claimed Russia’s aggression in the Ukraine war – a bid to hurt Russia’s economy by depressing its oil export income. The higher supply and lower demand have led to declining prices, and the decision of the Organisation of Petroleum Exporting Countries (OPEC), in November 2014, to retain production levels has resulted in a sharp fall in prices. Oil prices have fallen from USD115 in June 2014 to below USD45 as at January 23, 2015.

Why the impact of the current oil price collapse is less intense
Compared to its state during the oil-price crash of 1986, the Nigerian economy has undergone sustained reforms, consolidated and advanced with initiatives contained in the Transformation Agenda over the past four years, which have enabled it to withstand the current crash in oil prices. These reforms have taken place both in macroeconomic policy management and in structural transformations in the real sector and infrastructure.

Oil price-based fiscal rule
In the past, the government’s revenue and expenditure fluctuated in line with oil prices. During periods of oil boom, government passively expanded expenditure and embarked on unguarded new projects. When oil prices crashed, the economy suffered intense shock from discontinuity of programmes and projects, resulting in costly and wasteful distortions and dislocations of economic activity.

In 2004, the government adopted an oil price-based fiscal rule. Under this rule, oil revenues earned above a reference benchmark oil price are saved in the Excess Crude Account. This is simply a recognition of the volatility and unreliability of oil revenues – a recognition that not all of oil revenue received in any current period belongs to that period. The adoption of this rule has helped to smoothen government expenditure and increase public saving for times of low earnings. Hence, a mitigation of oil price crash shocks.

Public finance management reforms have also helped to make a difference
The Government Integrated Financial Management and Information System (GIFMIS) was in recent years introduced for the efficient and accountable use of public resources and to guide the allocation of resources to address national priorities. A component of GIFMIS is efficient cash management through the use of the Treasury Single Account (TSA) to centralise government’s revenue collection and payments to optimize cash management efficiency and ultimately align borrowing with actual cash flows. Another component of the public finance management reforms is the Integrated Payroll and Personnel Information System (IPPIS) introduced to enhance payroll management and weed out “ghost workers”, thereby reducing leakages in the system.
Evidence of continuously improving public finance management and commitment of government to fiscal consolidation is obvious in the drastic reduction of the fiscal deficit-to-GDP ratio over the years. Whereas in 1986 the deficit-GDP ratio was 11.94 percent, in 2014 it was only 1.2 percent and as per the 2015 Appropriation Bill, it has been put at 0.79 percent (that is less than 1 percent). Complementarily, since the last two years, the Federal Government has taken initiatives to boost non-oil tax revenue. Under the supervision of the Federal Ministry of Finance, the Federal Inland Revenue Service has been working with a reputable consultant to improve tax administration and collection. This measure has proved effective in raising non-oil tax revenue.

Agricultural Transformation Agenda
In the real sector, the strength and resilience gained from structural reforms in the past four years are best illustrated from the advances in food security in particular and agriculture in general. The strategy of using electronic wallets to provide subsidized fertilizer, improved seedlings and other inputs directly to real farmers, instead of through middlemen, has raised famers’ access to these critical inputs from about 10 percent in previous years to about 95 percent in current years. Specific programmes for boosting the output of rice, cassava and yam are proving effective.

The government has deployed N13 billion for the establishment of 10 integrated rice mills and six cassava mills for private sector operation. Rice production has improved with rice being grown in all the 36 states in the wet season and 24 states in the dry season. Imported rice is being sustainably displaced. 12 million metric tonnes was added to food supply from domestic sources in 2014 alone. In the process, over 3 million farm jobs have been created.

The bottom-line is that: (i) Nigeria reduced its food importation bill from USD6.9 billion in 2009 to USD4.35 billion in 2013, and, (ii) more importantly, food is available nationwide and prices have been stable at affordable levels. Contrast this with a similar oil-exporting country, Venezuela, which is already experiencing long food queues and food riots following the crash of oil export earnings.

The fact that the agriculture transformation agenda has helped reduce foreign exchange expenditure by more than USD2.6 billion per annum means that the weakening of the naira and the depletion of foreign exchange reserves have been mitigated this time around. The plan is that in the next four years, when, along the current substitution trajectory, we would have concluded the strategic objectives of substituting major food imports (some fully, others partially), Nigeria would be conserving a minimum of USD5 billion yearly.

More effective public debt management
With the establishment of the Debt Management Office (DMO) in 2000, there has been a transformation in the approach to public debt management, with anticipation of stress situations – a perspective which was lacking during previous periods of oil price crash.

The DMO resuscitated the domestic bond market to provide an avenue for the government and the private sector to raise long-term funds for development. This capability enables the government to conduct counter-cyclical expenditure interventions in times of economic crisis, in a non-inflationary manner, as evidenced during the 2008-2010 global economic and financial crisis.

The DMO conducts a debt sustainability analysis annually and has developed a Medium Term Debt Management Strategy. These initiatives have, through anticipating possible shocks to the economy, helped to formulate appropriate responses by the government in the event of such occurrences. For example, it is in anticipation of oil price crashes that the DMO has ensured that Nigeria operates on a borrowing ceiling which is about 60 percent below the country’s peer group threshold. This precaution was non-existent in the past.

In addition, since 2008 the DMO has worked with state governments to develop sound debt management practices at the sub-national level with the establishment of Debt Management Departments in the 36 states and the FCT. The states now have accurate data on their debt portfolio. Although this institution-building initiative is still work-in-progress, there is no doubt that Nigeria is much stronger in public debt management this time than in the past.

Other countries’ experiences
Nigerians would better appreciate how much better we have coped with the current oil price shock by observing the ongoing experiences of other major oil-exporting and oil-dependent countries, like Venezuela and Russia.

Venezuela: Shortage of basic items – milk, coffee, sugar, meat and tissue paper. Long queues for essential items leading to public protests and riots; inflation at 63.61 percent as at November 2014; ratings downgrade by Moody’s and Fitch; using oil exports to repay Chinese loans; and, debt default expected.

Russia: Inflation rate has risen from 6.1 percent in January 2014 to 11.4 percent as at December 2014, mainly as a result of food inflation which is about 16.4 percent; scarcity of meat, poultry products and sugar; ruble devalued by 52 percent in 2014;
central bank interest rate increased from 10.5 percent to 17 percent in December 2014 and later in 2015 brought down to 15 percent which is still relatively high; and, Russian bonds downgraded to junk.

Conclusion
Shocks from crashes in the price of oil impact negatively on oil export-dependent economies, including Nigeria. A comparison of the impact of oil revenue crash shows that Nigeria is coping better with the current 2014/2015 oil price crash than it did with earlier occurrences. The reason the country is now more resilient and coping better is that it has been on a path of sustained reforms and structural transformation, particularly over the past four years, under President Goodluck Ebele Jonathan’s administration.
However, it is critical to point out that resilience does not mean invincibility of the economy to oil price crash shock if the shock is prolonged. It only means that we have the advantage of some time to adjust without panic.

Philosophy of the story
Economic and social development has two broad components: material advancement and intellectual maturity. As we strive to cover lost grounds in material advancement, we also need to emancipate along the mental path. In particular, we need to work on the development deficits inflicted by cynicism, pessimism and even outright deliberate blinding of facts. While it behoves all stakeholders to continue to highlight and work on areas of poor performance in the economy, it is equally a responsibility to recognize and even celebrate areas of accomplishment. To fail to appreciate our achievements, even if modest, is to encourage the development of a collective mental state in which there is no distinction between success and failure. Such a blurred picture of our collective condition weakens the national motivation to migrate materially from the undesirable and unacceptable to the desirable and acceptable.
The truth is that there are Nigerian individuals and institutions who are diligently working to build a great and proud Nigeria. For such patriotic and often noiseless entities, the pervasive culture of denial of the true state of affairs could be frustrating and even depressing. The fact that the impact of the collapse of oil price on Nigeria’s economy this time around is not as devastating as was the case with previous oil price crashes means that some positive transformations have, indeed, taken place. Cynicism must yield to optimism backed by unrelenting hard work.

ABRAHAM E. NWANKWO

Nwankwo is the director-general of the Debt Management Office