On economic implications for governance, business, development of fluctuating oil revenues

Oil revenue has been and still is the mainstay of the national economy and is likely to remain so for a long time to come, as it currently provides the bulk of government revenue and most of the foreign exchange earnings.

At present, crude oil exports account for about 90 percent of foreign exchange earnings and 80 percent of government revenue; thus making the country’s economy heavily reliant on the petroleum sector. This dominant role, coupled with inadequate management of oil revenue during periods of windfall, has pushed other productive sectors like agriculture, the traditional mainstay of the economy, from the early fifties and sixties, to the background; thus exposing the country to volatility in the crude oil market.

For a mono-product economy like Nigeria, it is not unprecedented, that fluctuations in the price of crude oil or a decline in oil production will impact the country’s revenue negatively.

This scenario was captured in a statement attributed to the former Central Bank Governor, Sanusi Lamido Sanusi, in 2011: “Our major concern is that a major decline in the price of oil or domestic output would lead to a massive depreciation of the currency, a collapse in reserves and a huge growth in deficits and some of the States outside of the oil-producing regions might find themselves in a situation where they are not able to pay workers’ salaries”. Not long after he raised this concern, the price oil dipped, and the economy has been thrown into a state of deficits, with the effects reverberating across other sectors of the economy.

 Implications of fluctuating crude oil price on governance

A fluctuation in the price of crude oil in the international market portends negative implications for government revenue.

Nigeria relies heavily on crude oil revenue to fund government spending. Oil accounts for about 15% of Nigeria’s GDP but it makes up about 80% of government revenue. Thus, a decline in oil price has adverse impact on government revenue; thereby increasing the requirement for borrowing and debt servicing and attendant impact on the funds available for capital expenditure.

Studies have shown that growth in oil exporting countries could shrink by about 0.8-2.5 per cent following a 10 percent decline in the annual average oil price. This would ultimately compound fiscal revenue losses, as Nigeria’s fiscal break-even prices exceed current oil prices. Based on the current crude oil prices, recent benchmarks for national budgets are unsustainable, as the government would have to borrow to finance the gap; and with States struggling to pay workers’ salaries.

It is disheartening to note that despite the positive windfall gains arising from the benchmark oil price of $79, $77.5 and $65 in 2013, 2014 and 2015 respectively, the country’s external reserves declined precipitously from $53.6 Billion in 2008 to $30.9 billion as at March 2015. With recent higher crude oil prices, external reserves have bounced back, and were at about $46 bn in August 2018. This flunctuating trend in external reserves reflects the current concern of the CBN to continuously defend the Naira in the face of flux in foreign reserves.

Effects of declining government revenue on business

A consequence of this fluctuation is the unsustainability of some of the CBN measures. Some of these measures, for example, tightening fiscal and monetary policies, have adverse consequences for other sectors of the economy.

Nigerian’s economy continues to post a gloomy outlook, as the fluctuations in oil prices and government revenue continue to reverberate through the fiscal and monetary policy framework. The attendant consequences of the unfavorable exchange rates for the Naira, increase in monetary policy rate, increasing cash to reserve ratio are amongst the challenges that could undermine business activities; especially with Nigeria’s heavy reliance on imports for both consumer and investment goods.

What have we done with our petrodollars

A reduction in inefficiencies within Nigeria’s prized oil industry will play a pivotal role in helping Nigeria realize its potentials. Despite producing an average of 2.38 million barrels per day in 2011 and holding the title of Africa’s largest crude oil exporter, Nigeria is nowhere near its productive potential. More recently, crude oil production has been declining. Production stood at roughly 1.5 million barrels per day as at June 2018. Ironically, Nigeria has to import refined fuel, due to its unproductive and inefficient oil refineries that operate sometimes at below 20% of name- plate capacity. Studies have shown that Nigeria could produce approximately four million barrels per day within 10 years. To do so however, requires a more efficient use of resources and thoughtful economic management.

Below are some of the quotes from some of Nigeria’s public officers, which reflect the mismanagement of oil revenues.

“We have suffered a great deal in this country, from our inability or unwillingness to manage our oil resources properly.

When oil prices are high, like now, a great deal of optimism sets in and we tend to spend all that we earn to meet our admittedly tremendous needs…..” Ngozi Okonjo Iweala, 2004 Budget Speech

“The challenges facing the petroleum industry today are enormous. Some of them are widespread uncertainty about the state of the on-going reforms in the industry with the nonpassage of the Petroleum Industry Bill (PIB); slowdown of investments in virtually all aspects of the industry …….; low growth of our oil and gas reserves; confusion surrounding the renewal of leases held by some oil companies”.

Senator Emmanuel Paulker, 2012; Senate Committee Chairman on Petroleum Resources (Upstream)

Call for economic diversification

Apart from the impact of fluctuating oil prices and declining oil production, the emergence of shale oil and gas and electric cars represent a clear and present ‘lion threat’ to the revenues of OPEC (Organization of Petroleum Exporting Countries) Member States which includes Nigeria, and an alert for economic diversification for all Members through the auspices of their petroleum revenues.

The four critical areas for diversification should be in infrastructure development, downstream petroleum sector, power sector, and in research & development.

Regrettably, Nigeria’s foreign direct investment (FDI) inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industries. Such a mono-sectoral concentration in FDI limits technology transfer and inhibits job creation.

However, through a conscious effort geared towards diversification of the economy, Nigeria can also diversify the distribution of the FDI it receives. Nigeria should attract FDI in other sectors, including manufacturing, agriculture, tourism, consumer products, and construction, as these sectors could generate additional jobs and create a more balanced economic growth.

 Power sector as a panacea for industrial and economic growth

“Affordable Energy in ample quantities is the life blood of the industrial societies and a prerequisite for the economic development of others”.  Jon Holdren, 2001 There is no doubt that Nigeria is blessed with abundant energy resources, but the challenge has always been in regard to how to utilize the revenues to diversify the economic base, particularly the power sector.

Consequently, the country is plagued with the inability to generate adequate power supply for the teeming populace and the business sector. The consequence of generating only 3500MW of power is the incessant power outage (black-outs & brownouts), which continues to threaten small and medium- scale enterprises, as well as increasing the cost of doing business in Nigeria. It is imperative for the government to diversify the energy mix, so as to guarantee security of energy supply.

The following quote from President Obama captures the ubiquitous importance of developing a robust power sector.

“….. And we believe that nations must have the power (electricity) to connect their people to the 21st Century. Access to electricity is fundamental to opportunity in this age…. It is the lifeline for families to meet their basic needs. And it is the connection that is needed to plug Africa into the grid of the global economy”. President Barrack Obama, 2013.

The dilemma

Professor Paul Wihbey’s quote below encapsulates the Nigerian dilemma in regard to management of the petroleum sector and accruing petrodollars revenue. “

Oil theft (the systemic looting of oil-related funds and placement in overseas assets) and bunkering (pipeline vandalism and organized thievery), both represent potential amount of substantial funds that have been lost to the government, but can be repatriated to a notable degree, through various processes. With the political, diplomatic, and technical assistance of the United States, FG stands to regain upwards of $150 billion in looted monies, a figure that President Buhari referred to during his July 2015 visit to Washington DC”. Paul Micheal Wihbey, President, GWEST CONSULTING, Washington DC.

The upsurge of oil theft in Nigeria has assumed alarming dimensions. It was estimated that Nigeria was losing between 300,000 to 400,000 barrels of crude oil per day to oil theft, pipeline vandalism and related crimes by 2015. The volume seems to have reduced since President Buhari came to power. The incessant vandalism of pipelines and other oil infrastructure across the country as well as trade in stolen oil by criminal cartels with international connections have continued unabated despite Federal Government efforts.

Thus, oil theft and illegal bunkering activities in the Niger Delta pose a challenge that threatens the very foundation of the oil industry, and by extension, the Nigerian economy. It was against this backdrop that the Nigerian President on his Togo visit in 2015 affirmed that:

“It is not easy for my administration to fight terrorism, oil theft and corruption at the same time. In spite of the difficulties being faced in fighting these scourges, my administration would not relent in eliminating these vices from the nation’s body polity”. President Muhammadu Buhari, Sept 11, 2015.

It is ridiculous to note that Nigeria is considered one of the top 40 most corrupt nations in the world, particularly in its dealings with the oil industry. The most recent fuel subsidy scandal involving Nigerian oil companies and Nigerian officials, which lasted three years and cost the country $6.8 billion, is representative of the larger, omnipresent problems of corruption, weak leadership, and economic mismanagement. However, through strengthening its democratic institutions, Nigeria can tackle corruption, maintain political stability, and make good governance a priority.

 What needs to be done?

In the quest for plausible strategies that will prevent the government and the economy from plunging into backwardness and recession, at least in the short to medium term, the government should make conscious effort to:

• Secure significant new market share for crude oil exports in China and India. USA is now a net exporter of crude. This will represent a continuous source of revenue for the Nigerian treasury, until the switch to electric cars comes fully into the equation.
• Diversify the petro-dollar economy into other sectors (power, agriculture, mining, and manufacturing sectors, etc) without further delay.
• Increase in-country crude refining capacity for domestic selfsufficiency and export of petroleum products.
• Plug crude oil theft and illegal bunkering activities.
• Plug all loopholes in government revenue looting.
• Plug all loopholes in tax revenue remittance.
• Save adequately for future generations by linking every barrel to socioeconomic development through sound policies and hard-wired legislation. For drastic economic development in the face of fluctuating oil revenue, we must face the fact that, there are no easy options; there are only hard choices to be made.