The Nigerian economy has always thrived with huge revenue generated from the oil sector. It is said that revenues from oil sector accounts for over 70% of the country’s foreign exchange earnings.
However, with the devastating effects of the Coronavirus that has crippled virtually all sectors of the economy, there has been calls for total diversification from oil.
Only recently, the minister of finance, budget and national planning said the country expects to see negative growth for both second and third quarter of the year, which will mean that Nigeria may possibly slip into another recession for the second time in four years.
The rationale behind this is the sharp drop in oil prices and the compliance with OPEC production cuts by over 300,000 barrels per day.
The COVID 19 pandemic has thrown most countries into sudden crisis with Africa’s economic giant, South Africa, already in recession and other top countries in the world.
It has also exposed the inherent economic vulnerabilities of mono product resource-dependent countries like Nigeria.
A trend analysis of oil price shocks covering May 1987 to May 2020 showed that the global economy had witnessed about 8 oil price shocks in 34 years.
Four of these crises brought about oil price spikes namely: the Gulf War in 1990, War on Terror/ Venezuelan crises in 2005, global economic expansion and OPEC Plus Agreement in 2018 and 2019.
Again, there was a global price fall during the East Asian Financial Crisis in 1998, global financial crisis in 2008 and 2009, shale oil production period in 2014 and recently during the COVID-19 lockdowns in 2020.
Statistics of oil revenue as a percentage of total federation revenue showed that from 1981 to 2014, oil revenue consistently accounted for about 65% to 85% of total federation revenue.
However, just in the last 5 years (2015 – 2018) that oil revenue was below 60% of total revenue. The reason could be deciphered from low oil prices and increased efforts to boost non-oil revenue
As such, there has been calls by experts and stakeholders for the need to diversify with strong political will and commitment to ensure that the perennial challenges recorded from the oil price shocks can be averted.
Consequently, a policy brief document released by Nigeria Extractive Industries Transparency Initiative (NEITI) tagged “Insulating Nigeria from Perennial Oil Price Volatility” released in July 2020 detailed some steps which the Nigerian government can take to curb the volatility of oil prices.
NEITI’s policy brief listed three important pathways that will protect Nigeria from the perennial challenge of oil price slump.
First is for the country to “Maintain a robust ‘rainy day’ fund, the size of which should reflect not only the volume of revenues from mineral resources, but also the size of the national economy”. While Nigeria has an oil savings fund, NEITI stated that the savings are too small to serve its intended purposes.
However, the paper identified challenges towards Nigeria achieving and maintaining a healthy oil savings fund. The constraints are constitutional and the difficulty in achieving centralised savings in a regime of fiscal federalism.
NEITI, therefore, recommends that Section 162 (1) of the 1999 Constitution should be amended to mandatorily allow for part of the oil earnings to be saved; that the 0.5 per cent stabilisation fund and the Excess Crude Account (ECA) be abolished and the balances in the accounts transferred to the NSIA; the Oil Price-based Fiscal Rule (OPFR) where revenue in excess of oil price benchmark is saved should be abolished and replaced with mandatory savings of a percentage of daily oil production.
“This will remove the constant political jousting about oil benchmark price and quantity”, the policy brief advised.
NEITI also recommended that proceeds from the percentage of daily oil production should be transferred to the NSIA and the funds invested in convertible instruments while the NSIA’s stabilisation fund should be increased from 20 per cent to 40 per cent and dividends from its earnings shared every year.
According to the brief, increasing NSIA’s stabilisation fund and sharing the dividends from investments will give comfort to the states and LGs to support constitutional amendment and the scrapping of ECA.
On the second strategy, NEITI noted that a lot more needs to be done in order to boost non-oil revenue and export to improve foreign exchange earnings. Increasing revenues from taxes and tariffs and boosting raw and processed agricultural and solid minerals exports are some of the strategies the policy brief put forward that could help Nigeria diversify its earnings from exports.
NEITI also pointed out that the present efforts by the Nigerian government to correct the distortions in the economic structure should be intensified, adding that macro-economic stability should be maintained, ease of doing business improved with incentives and reforms put in place to further attract foreign and local investors in areas where Nigeria has comparative advantage.
Investments in physical and human infrastructure should be increased so as to reduce the cost of doing business, it added.
The third strategy, NEITI noted, is to get more from the oil and gas sector in other to aid the development of other revenue and export streams. The organization said “Blocking leakages and maximising opportunities in the sector will help in increasing government revenues and the contribution of the sector to national productivity”.
This, it argued, can be achieved through elimination of crude oil and refined product theft, full deregulation of the downstream sector and boosting of gas production and utilisation.
Other recommendations, it said, include fast-tracking the passage of the Petroleum Industry Bill (PIB), institutionalising transparency in the oil and gas sector as well as systematic and proactive disclosures in areas of contracts, productions, revenues, commodity trading, beneficial ownership, bid rounds and production costs, among others.