COVID-19 will hit Nigeria very hard; this is not uncommon with the experience of other countries. The pandemic, though a public health issue has significant economic impacts. For Nigeria, the channels of its impact include, reduced foreign capital flows, including remittances; fall in commodity prices, including oil and gas; and closure of global supply chains and closure of most economic activities due to lockdown policies across the country.
Nigeria is anything but prepared for the pandemic and the sharp fall in oil prices. We have refused to learn from past cycles of global economic shocks. The unprecedented fall in oil and gas prices couple with other effects of the pandemic, have brought to the fore again, the centrality of oil and gas in the nation’s economy. In my view, it is an illusion that Nigeria economy is a post oil economy on the basis of just one indicator, the share of oil in GDP. Oil remains the major source of government revenue and major source of foreign exchange to finance critical imports and protect the nation’s currency. The performance of other non-oil sectors of the economy is directly or indirectly influenced by global oil market behaviour.
The precipitous decline in the price of Nigeria’s crude oil to below $20 per barrel in the international market is a bad omen for the economy. The pass through of the effects of the decline on the economy will be immediate, extensive and significant. This is primarily because we have no buffers to defend the economy. We failed to build fiscal buffers when oil was doing well, failing to meet the NNRC’s 8th Benchmark which warns the government that during the inevitable downturn of oil prices, the buffers are necessary to “smoothen domestic spending of revenues.” We ran down our excess crude accounts without augmenting other forms of capital or savings like the Sovereign Wealth Fund (SWF).
The Excess Crude Account (ECA), which was established in 2005, represented first real efforts by the country to have a formal framework for savings from oil rent. The ECA was designed to smoothen government’s spending which follows the cyclical pattern of crude oil price. The primary source of funding for the ECA is the excess funds from the differential between the realised oil price and the benchmark price, anchored on the Oil Price-based Fiscal Rule (OPFR). Setting the appropriate benchmark price is critical to the ECA achieving its objective of smoothening fluctuations in the economy.
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However, the lack of discipline in implementing the framework has contributed to the low yearly inflow that comes into the account especially after 2009. The executive branch, but more often the legislature, have consistently adjusted the benchmark price upwards to increase the fiscal space for increased expenditure, This, invariably reduces the savings opportunities that higher oil price would have presented for the economy.
Not a few analysts are of the opinion that one major reason Nigeria was able to mitigate the impact of the 2008 global financial crisis was the availability of fiscal buffers provided by the ECA. This provided the government with fiscal space to increase domestic spending needed to reflate the economy, as well as the foreign reserves needed to finance imports and support the naira, even under major negative oil price shock.
However, the lack of fiscal discipline and fidelity to the principle of the oil price-based framework, did not enable the country to have same fiscal leverage to cushion the effect of oil price crash of 2014 as well as the economic effects of the current coronavirus pandemic. Foreign reserves in 2008 stood at $53 billion, compared to $34 billion in 2014 and $35 billion in January 2020.
COVID-19 shuts down global economy and cuts significantly global demand for oil. The cut in demand was exacerbated by oversupply that occurred due to price war between Russia and Saudi Arabia and the failure of OPEC+ members to reach an agreement on needed production cut to manage global oil demand. These factors plus absence of spare storage capacity to store the excess oil have led to the soft oil price that the country is faced with.
The recovery of oil price is going to be slow as global economy reopens cautiously. This has rendered key assumptions of 2020 budget unrealistic, in particular, the $57 per barrel benchmark price in the budget which made sense last year when the price of oil was above $65/bbl, but not anymore in light of current oil market development. It is good that the government has revised downwards both the oil price as well as the benchmark volume of oil to $30/bbl and 1.78mb respectively. With recent development, the $30/bbl assumed also seems quite optimistic. A conservative estimate around $25/bbl seems more reasonable.
The 2019 budget performance was exceptionally bad. Actual revenue was 50 percent of budgeted revenue, while actual expenditure exceeded budgeted expenditure. By December 2019, actual budget deficit stood at -N4,838.79 billion as against the 2019 budget estimates of -N2.18 trillion or 1.5 percent of the budget. The budget deficit largely financed through ways and means is a major cause of inflationary pressures in the country.
Thus, with the significant revenue underperformance in 2019, the low savings in the ECA, there was little elbow room for government for provides adequate financial relief to stabilize the economy during and after the COVID-19 pandemic. Nigeria has resorted to external support of over $7 billion from the IMF, the World Bank, the ADB and Islamic Development Bank among others. The rising foreign loans are going to add to the foreign debt portfolio of the country which will bring significant economic management problem in the future.
When all these are over, will the government learn from this and other past experiences? This is the fear of most people. To tackle these concerns, it has become imperative that as the country is planning a successor medium development plan to replace the ERGP, a mechanism for incorporating compulsory savings from the rent from natural resource exports must be incorporated into the plan. In addition, at least 50 percent of earnings from petroleum should be devoted to capital expenditure. This will no doubt requires a change in the present constitution to provide for these changes and allow for consolidation of current savings mechanisms into a transparent and effective single source.
There is also need for the diversification of the economy both vertically and horizontally. The later implies that the country does major value addition to our crude oil and natural gas domestically through establishment of downstream industries using natural gas and crude oil. We should stop exporting crude oil and natural gas in their primary forms.
The wasteful oil subsidy policy of the past should be jettison. In addition, non-profitable government owned assets, like the refineries should be disposed off. The lower levels of government should also develop their own savings mechanisms to protect their economies from the vagaries of the federation account.
Prof. Adenikiju is of the Centre for Petroleum, Energy Economics & Law, University of Ibadan, and member, expert advisory panel of Nigeria Natural Resource Charter (NNRC)