To insulate the economy from unstable oil prices, Nigeria needs a robust ‘rainy day’ fund, wean itself off unhealthy dependence on oil, get more from the commodity to aid development of other revenue and export streams, and block leakages, says a policy brief from an oil sector watchdog.
The Nigerian Extractive Industries Transparency Initiatives (NIETI), in its latest policy brief said constant oil price volatility exposes oil-dependent countries like Nigeria to regular economic crises. It is worsened by COVID-19 creating the need for a sustainable strategy to cope with oil price shocks.
Oil savings
“A healthy minerals savings fund, the size of which should reflect not only the volume of revenues from mineral resources, but also the size of the national economy, is usually recommended for resource-rich countries,” said NEITI.
Nigeria is already sold to the idea of saving some oil windfalls but NEITI said the funds are mostly inadequately ring-fenced, and are too tiny to fully serve the intended purpose.
Nigeria’s three ‘rainy day’ funds – Stabilisation Fund, Excess Crude Account, Nigeria Sovereign Investment Authority (NSIA) – have about $2.25 billion, which can fund about 7.7 percent of the revised 2020 federal budget. This compares poorly with Norway, with a sovereign wealth fund worth more than $1 trillion. To assuage the impact of COVID-19 on government’s earning, Nigeria withdrew $150million but Norway cashed $37b. Norway’s withdrawal ($37bn) is about 25percent higher than the Federal Government’s N10.5trillion 2020 budget.
However, Nigeria’s challenges are more fundamental. NEITI suggests amending Section 162 (1)of the 1999 Constitution which prescribes that government income, apart from personal income tax, should be placed in the Federation Account and shared among the Federal, State and Local Governments.
Former president Olusegun Obasanjo began the Excess Crude Account in 2004 to save oil revenues above income benchmarks and state governors balked. In reality, apart from spending pattern often accused of being frivolous, many states are challenged by today’s problems so the country needs to earn more money.
NEITI also recommended abolishing the 0.5percent Stabilisation Fund and the ECA then transferring the balance in those accounts to the NSIA.
The transparency watch dog further advised Nigeria to abolish the Oil Price-based Fiscal Rule (OPFR) where revenue in excess of oil price benchmark is saved and replace it with mandatory saving of a percentage of daily oil production like Angola does, saving proceeds from 10percent of its daily production.
This ensures savings at all times, whether prices are high or low. Nigeria can save proceeds of between 5percent and 20 percent of its daily oil production. With this, Nigeria could easily save between $1b and $3b every year even in period of low oil prices.
NEITI further recommends transferring the proceeds from the percentage of daily oil production to NSIA to invest in easily convertible instruments as well as raising the NSIA’s Stabilisation Fund from 20 to 40 percent and sharing dividends from NSIA’s earnings every year.
Reduce oil dependence
According to NEITI, Nigeria is making progress on this front but needs to do more to increase revenues from taxes and tariffs. It called the Finance Act 2020 which reduced Corporate Income Tax (CIT) to 20 percent and raised Value Added Tax (VAT) to 7.5 percent, a bold step that reduces corporate tax raise government revenue.
“It is important to further streamline the tax code, expand the tax base and improve collection efficiency,” it said,
NEITI also called for boosting non-oil exports which according to the Central Bank, increased from $4.6b in 2018 to $10.4b in 2019, bumping non-oil export to 16 percent of total exports ($64.9b) in 2019.
“This is a good pointer to what is feasible. It will be important to further diversify sources of exports and foreign exchange earnings by boosting not just raw but processed agricultural and solid minerals exports, fast-tracking the export processing zones and providing reasonable incentives to attract
investors to them, and introducing fiscal, monetary and industrial policies that will make the country competitive for direct and portfolio investments,” it said.
Correct distortions in economic structure
The third policy counsel from NEITI is for resource dependent countries like Nigeria to correct distortions to their economic structure, by reducing dependence on imports, and ensuring that the agricultural, manufacturing and services sectors can compete and meet both domestic and export needs.
It recommended ensuring macro-economic stability, further improving on the ease of doing business, investing more in physical and human infrastructure which should reduce the cost of doing business.
Blocking leakages
Blocking leakages and maximising opportunities in the sector will increase government revenues and oil sector contribution to national productivity.
One area is eliminating industry-scale theft of crude oil and refined products estimated at $41.9bn within the last ten years, by strengthening the law against the practice and giving communities greater stakes in oil resources.
It also called for embracing full deregulation of the downstream sector, boosting gas production and use, fast-tracking passage of petroleum industry bills, and deepen transparency in the oil and gas sector.
