…not enough to fund 20% of 2017 federal budget
26 July 2017, Sweetcrude, Lagos — Nigeria has one of lowest natural resource revenue savings in the world, with the balance in the three funds (0.5% stabilization fund, Excess Crude Account (ECA) and Nigeria Sovereign Investment Authority (NSIA)) less than $3.9 billion, not enough to fund 20% of 2017’s federal budget, Sweetcrude Reports’ findings have revealed.
According to a document, ‘The Case for a robust oil savings fund for Nigeria’ obtained from the Nigerian Extractive Industries Transparency Initiative (NEITI), revealed that despite current efforts to pull Nigeria out of recession, the economy remains vulnerable to one of the conditions that created the problem in the first place: lack of adequate and prudently managed savings in a period of plenty.
Nigeria did not save enough oil revenues to sustain economic activities when oil prices began to tank in June 2014, as data showed that when oil prices began to tumble from June 2014, Nigeria had just $2 billion in the ECA, despite having remitted a total of about $200 billion in excess crude proceeds into the account between 2004 and 2014.
Nigeria’s $1.5 billion sovereign wealth fund is one of the lowest in the world, has one of the worst ratios to annual budget (10%), and one of the lowest SWF per capital ($8), better only than war-torn Iraq and crisis-hit Venezuela, but not by much.
In contrast, Norway, a country of 5.2 million people (2.8% of Nigeria’s 186 million people) has a sovereign wealth fund worth $922 billion (which is 23,641% of the $3.9 billion balance in Nigeria’s three oil revenue funds).
Between 2005 and 2015, $201.2 billion accrued to the ECA but $204.7 billion was withdrawn from the ECA during the same period, indicating that withdrawal was 102% of the deposit, according to data obtained from NEITI.
The establishment of a sovereign wealth fund (SWF) by the government in 2012 was intended to address the governance issues associated with the ECA, while the SWF is a vast improvement over the ECA, it has inherited the same constitutional hurdle that dogged the ECA.
Until recently when $500 million was paid into the SWF, little savings had been made beyond the $1 billion seed capital transferred from the ECA in 2012.
Litigation between the federal and state governments over the constitutionality of the ECA and the SWF has lingered at the Supreme Court.
Also problematic is the level of consumption relative to non-oil exports.
Nigeria typically responds to high oil prices with equally high, but manifestly unsustainable, level of consumption.
The absence of sufficient savings left Nigeria severely exposed when the price of oil, Nigeria’s main source of government revenues and foreign exchange, started to plunge in 2014.
It was a sad turn, but not totally unpredicted. Countries that depend on revenues from natural resources to finance their budgets are characteristically prone to the boom-and-bust cycle.
One major way in which resource-rich countries have sought to insulate themselves from such volatility is by setting up stabilisation funds. The objective being to set aside money, especially during periods of high prices, which would be used to “smoothen” expenditure when prices fall.
This insulates the economy from the effects of price volatility, ensuring the country would not necessarily go bust when price falls. Stabilisation funds also protect these countries against the Dutch Disease, which itself is a consequence of how countries choose to spend natural resource revenue.
Nigeria established the Excess Crude Account (ECA) in 2004 based on a fiscal rule where crude oil earnings in excess of a budgeted price and production volume are transferred into the account. However, very little savings were accumulated during a period of consistently high prices, as the basic fiscal rules were not observed, according to the document obtained.
When oil prices began to tumble from June 2014, Nigeria had just $2 billion in the ECA, despite having remitted over $200 billion in excess crude proceeds into the account between 2004 and 2014.
In addition to price volatility, Nigeria also faces the prospect of depleting oil reserves.
Nigeria’s proven oil reserves as at 2015 were 37 billion barrels.
At the current level of production, the reserves are projected to last for 40 years, counting from two years ago.
Meanwhile, in the last forty years of production at less than current levels, Nigeria extracted about 31 billion barrels of its oil reserves.
From 1980 to 2015, Nigeria exported crude oil worth about $1.09 trillion.
As at June 2017, there was less than $3.9 billion dollars in all of the country’s oil revenue funds. This is only enough to finance 16% of the current (2017) budget of N7.44 trillion.
“Given this scenario, it can hardly be said that Nigeria currently has a serious future generation’s policy in the management of its oil revenue. Yet a review of more than fifty sovereign wealth funds around the world shows that almost all of them were established with an overriding future generations’ objective. The prospect of a looming depletion of Nigeria’s oil resource raises the urgency of the need for accelerated savings for the benefit of future generations” NEITI said.