• Friday, March 29, 2024
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Depleting excess crude account leaves economy vulnerable to oil shocks

Nigerian crude

In three weeks between November and December, Nigeria’s excess crude revenue account went from having a balance of $2.319 billion to $637 million, a drawdown of about 73 percent, which leaves the economy more vulnerable to shocks from a volatile oil market.
The Excess Crude Account (ECA) was created to retain excess revenues from the prevailing crude oil price at the international market. Income generated above the approved crude oil benchmark price in the annual budget is saved in the account as some sort of buffer.
Established in 2004, the ECA demonstrates how to normalise an aberration. Without constitutional backing, the ECA was created to protect Nigeria’s planned budgets against shortfalls caused by the volatility of crude oil prices. In this way, it would insulate the economy from external shocks.
Analysts say the continued withdrawal from the ECA limits its ability to act as buffer if crude prices suddenly plateau.
“It will also seriously impact the government’s ability to fund critical infrastructure,” said Chuks Nwani, an energy lawyer.
Recall that it was the $1 billion funding from the ECA in 2013 that was the seed capital used to establish the Nigerian Sovereign Investment Authority (NSIA). Money from the second SWF has been used to fund construction of the second Niger Bridge and to buy military hardware to fight Boko Haram insurgents.
Isah-Dutse, permanent secretary, Federal Ministry of Finance, said the money was withdrawn to settle the last tranche of the Paris Club loan refund to states. He further said N812.762 billion was distributed between the federal, state and local governments for November 2018.
With only a paltry $637 million left in the ECA, Nigeria will pray for stabile oil price within the next few months. But this is hardly within its control. The oil market has become so volatile that a tweet from Donald Trump could easily send prices reeling, as would a crisis in Latin America.
“Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!” Trump tweeted on February 25.
Soon after, oil prices tumbled more than 3 percent. International benchmark Brent crude futures fell $2.36, or 3.5 percent, at $64.76 a barrel.
However, Nigeria may not need Trump’s tweet to bring economic Armageddon closer to home. It can do it all by itself. The stock market lost about N85 billion after the Independent National Electoral Commission announced that President Muhammadu Buhari has been re-elected. Unguarded utterances from government functionaries could further endanger the economy.
“This is the time to tighten the belt and avoid reckless expenses,” Nwani said.
However, a depleting ECA only complicates the situation with the controversial funds. Withdrawal from the account is subject to the approval of the three tiers of government and the Federal Executive Council (FEC), but this was not obtained prior to the disbursements.
In a report released last week, New York-based Natural Resources Governance Institute (NRGI), an extractive sector transparency watchdog, rated Nigeria’s excess crude account as one of the world’s worst-governed fund in 2017.
In the organisation’s assessment of sovereign wealth funds in 33 countries as part of its 2017 Resource Governance Index, Nigeria’s ECA was found to be one of the worst-governed funds. The NRGI governance index includes new assessments of oil, gas and mining governance in 81 countries.
Nigeria’s ECA is part of the 11 sovereign wealth funds worth about $1.5 trillion rated as failing by NRGI researchers.
The ECA grew from $5.1 billion in 2005 to over $20 billion by 2008, accounting for more than one-third of Nigeria’s external reserves at the time, but it suffered massive decline during the administration of former President Goodluck Jonathan, from nearly $20 billion when he took office in 2009 to a paltry $2billion when he left office in 2015.

ISAAC ANYAOGU