For a long time, scholars, analysts and watchers of the global political economy have urged Nigeria to diversify its economy and stop its dependence on rents from oil. The reason for this is that oil is a cyclical business and oil prices rise and fall intermittently. It is therefore not conducive for good economic planning and forecasting. Nigerian government officials accept this argument and have always pledged to diversify the economy and stop the country’s over-dependence on crude oil. But it has always ended at that. The country continues to depend on the rents from oil to finance the federal, state and local governments. In fact, the Nigerian federation was designed to be financed principally by oil rents. Currently, oil accounts for more than 90 percent of the country’s exports, 25 percent of Gross Domestic Product (GDP), 95 percent of foreign exchange earnings and 80 percent of total government revenues.
From the early 1970s, the pattern has always been the same: fully enjoy periods of boom, borrow heavily to sustain governments during periods of decline and wait for the prices to pick up once again. Fortunately, it has always worked and Nigerian politicians have come to believe in the ingenuity of this style and so never really cared about the changing trend in the oil market.
However, the Shale gas revolution has changed everything. The United States that hitherto used to be a net importer of crude oil is now the largest producer of crude oil in the world and is on the verge of lifting a 40-year ban on crude oil exports. This, coupled with declining demands due to growth slowdown, the re-entry of Iran into the global oil market, significant new oil discoveries and persisting surplus production, may further crash the price – with some analysts predicting it to reach $20 dollar/barrel – and prices may take a very long time to rebound.
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Predictably, the moment crude oil prices began to decline, Nigerian states were thrown into turmoil. By May this year, most of them had gone bankrupt and owed salaries of upwards of 10 months. Things were about to fall apart when the federal government was forced to advance a bailout to the states to stave their total collapse and the anarchy that would have followed. But the bailout was just a short-term solution. The money has run out and the problem of inadequate revenue still stares the states in the face. In a candid moment, the Katsina State Governor, Aminu Bello Masari, confessed that “in three to six months’ time, some states will find it difficult to pay salaries due to fall in the price of oil in the market”.
Already, some state governors have indicated that they are unable to continue to pay the N18,000 minimum wage. They gave two options: either they are allowed to drastically reduce wages or they will be forced to retrench workers.
Meanwhile, according to Cable News Network (CNN), the cost of producing a barrel of crude oil in Nigeria is $31.60. The production cost was calculated by adding up capital and operational expenditures in the fields of production such as expenditures in building oil facilities, economy pipelines, new wells, cost of lifting out crude from the ground, wages and administrative expenses. What this means is that soon – if the crude oil prices continue to fall – the cost of production may be greater than the price of crude oil in the international market making it unsustainable to continue to produce crude oil.
The typical Nigerian response to declining oil revenues is to go borrowing from international creditors to finance the governments/budgets and keep hoping that oil prices rebound. This is the template adopted by the current Buhari administration. In the N6.08 trillion proposed budget for 2016, approximately N2.2 trillion will be financed from borrowings – both domestic and international – while N3.86 trillion is projected to be generated from crude oil sales and non-oil taxes and independent revenues.
But even before the budget proposal is considered by the National Assembly, crude oil prices have slipped below the budget benchmark of $38 per barrel. This means that the budget figures are unrealistic and the government may have to finance it through increased borrowings or default altogether in its implementation.
How does Nigeria get out of this hole then? The Buhari administration swept to power through the incredible force of his change agenda. Buhari promised to end corruption, impunity, and insecurity and institute a regime for prudent management of national resources and respect for rules, procedures and national institutions.
However, it has become apparent that those changes alone are not able to get Nigeria out of the woods. More fundamental changes are required. First, there needs to be a change to the laggard federal structure of Nigeria that made states deliberately small, fractured and weak, and incapable of independent existence outside the federal government and without oil revenues. There needs to be a change to how the Nigerian government is financed – a change from an over-reliance on rents, or as some scholars say “un-earned revenues”, to a more diversified and productive revenue base.
Nigerians, on the other hand, that have been so vociferous in demanding for good governance and government accountability must realise that it is not possible to have government accountability in a polity where the government’s revenues do not come directly from the people. This means that as they demand for good governance and accountability, they must be willing to pay their taxes fully and promptly. Taxation, as it were, is the umbilical cord that ties the government to the people and concretises the idea of the social contract. I wish you all a Happy New Year!
Akor is a member of BusinessDay Editorial Board.
CHRISTOPHER AKOR
