How Oil Price and Production Swings Determine The Fate of A Nation – The Nigerian Experience

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Sunday, August 26, 2018 11:46AM / BudgIT

On the face of it, there is nothing exceptional about Nigeria’s current economic crisis; it is simply the manifestation of years of the State’s dependence on revenue from the volatile commodity that is crude oil; a persistently unhealthy domestic business environment; external trade shocks; wilful dysfunction between fiscal and monetary policies; weak institutions and the lack of a diversified exports policy to boost foreign exchange earnings. What is exceptional is that Nigeria somehow managed to hold out for this long, before the bust.

 

Most countries whose governments depend on oil have experienced the rollercoaster ride that is trading in Crude, with the most prudent ones such as the United Arab Emirates and Norway proactively building fiscal buffers to manage any accompanying market shocks.

 

The fate of the Nigerian economy is indefinitely tethered to the inevitable swing in oil prices, given that oil remains a major export commodity. In-country, most manufacturers depend on foreign exchange earnings from the oil sector to acquire spare parts, procure machines and expand capacity. Prior to the civil war, Nigeria was mainly an agrarian economy, running a regional system of government where regions contributed a percentage of resources to the parliamentary central government.

 

These regional governments, despite relying on external donations for projects, were sustainable; they all had recurrent surpluses (based on internal revenues) to cover their recurrent expenditure. This meant that there was no such occurrence as is being witnessed today, where 27 of 36 States struggled to pay salaries based on a drastic drop in Federation Account Allocation Committee (FAAC) disbursements.

 

The regions were a creation of the unitary system of government formed in 1966. In that year, the entire Federation ran a surplus budget of £18mn, with the Federal government and the Northern Region having the highest amount of extra funds in their coffers. The Western region spent almost all its entire revenue on recurrent expenditure, a bellwether of an expansive social policy that prioritised education and health programs.

 

The fiscal dynamics of this period show an even split along economic and social projects, with a focus on building dams, bridges and schools. Capital expenditure was also amply financed from borrowings and internally-saved funds, budget surpluses and transfers from the Federal government.

 

Just less than half a decade later, in 1970, the dynamics of Nigeria’s economy changed, as average oil production rose to 1.08million barrels per day, heralding a new era of Crude-driven government earnings. Despite the rise in oil production, Crude prices at $3.407 in 1970; oil revenue was a mere 26.2% of Total federally-collected revenue, which rose from N448.8mn in 1970 to N1.4bn as at 1972.

 

In 1973, the start of the Arab Oil Crisis made the price of Crude quadruple, from $4.73 in 1973 to $12.21 per barrel in 1975. By the end of 1975, it was evident that Nigeria was willing to let Crude take the lead, with oil accounting for 77.5% of government revenue. The influence of this hitherto relatively insignificant hydrocarbon resource suddenly grew within a decade, as global interest in the oil and gas sector skyrocketed.

 

A strong case exists for the argument that the seed for Nigeria’s obsession with, and longstanding reliance on Oil started with the price glut of 1973; as Arab nations shut down production, Nigeria’s Sweet Crude blend fast became the toast of the industrialized world.

 

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As Oil flowed out of Nigerian soil and returned as foreign exchange into the country’s purse, in 1972, the government notably expanded its spending with the “Udoji award,” named after the Jerome Udoji Commission report which led to various policies, including a rise in public servants’ salaries. Mainly on the back of Oil, government revenue grew from N631mn in 1970, to N5.5bn in 1975.

 

During this period, Nigeria’s debt also expanded significantly; from N756.4m in 1970 to N3.72bn in 1975, caused by a sudden jump in the value of imported goods and services. The beginnings of Nigeria’s addiction to Crude revenue likely went up a notch at this time, as the government’s policy thrusts were seemingly based on the assurance of a continuation of the Oil boom.

 

Two things illustrate this point: rather than invest earnings in the diversification of export and public revenues, leaders favoured a bloat in Recurrent Expenditure, which rose from N963mn in 1973 to N2.73bn by the end of 1975 - a 183% increase over just two years. Secondly; the government also created more States, expanding bureaucracy at all levels and unwittingly establishing the foundations for the ghost-worker syndrome that blights Nigeria’s civil service till date.

 

This increasing dependence on black gold persisted, and by the time the military government prepared to handover to civilians, Federal government spending ballooned by 196% over a five-year period; from 1974 levels of N2.7bn to N8bn in 1978.

 

Nevertheless, Nigeria kept up it public spending figures, in tandem with public debt - by 1980, Total government spending topped N14.98bn. In 1981, Crude prices averaged $35.75 per barrel, as against $14.95 per barrel in 1978.

 

However, Nigeria’s production numbers plummeted to 525.5 million barrels per annum, from 1979 levels of 752.2 million barrels, tilting the economy towards a recession.

 

In spite of this sag in oil production and a mild Oil price crash in 1982, the Nigerian government continued enlarging its debt profile. By and large, the government prioritized agriculture and steel projects which were scattered across the country, borrowing heavily to build them.

 

Foreign debt came to N8.8bn in 1982, from N1.25bn in 1978, and Oil revenues which rose to N12.35bn in 1980, sunk to N7.81bn in 1982. This slide persisted, with Oil production figures plummeting in 1986, taking Nigeria down from the peak production levels enjoyed in 1979. These trends culminated in a lack of confidence in the Nigerian economy and massive capital flight -estimated at US$14bn between 1979 and 1983.

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By the mid-1980s, Nigeria’s currency was presumed to be overvalued, and foreign exchange reserves lay in a relatively weak position. The country began to ration foreign exchange, and placed a series of tariffs on imported materials. General Buhari’s government put up tight restrictions on currency control but this did not stop a slump in the economy.

 

General Ibrahim Babangida seized power via a military coup, and the presumption was this government had the opportunity to confront Nigeria’s worsening economic realities using a more open, pragmatic approach.

 

However, oil prices nosedived in 1986, reducing by 46.36% from an average of $26.92 per barrel in 1985, to $14.44 per barrel in 1986. Under Babangida, Nigeria adopted measures that included the Structural Adjustment Programme. Yet, increasing levels of corruption, poor economic advisers and unrestrained inflation due to poor monetary policies deprived Nigeria of tangible infrastructure and social development, as well as other gains that should ordinarily come with oil production.

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Dual exchange rates created colossal rent-seeking, with many cronies of the ruling elite buying forex at the official rate and reselling at four times the value in the black market. Corruption became institutionalised, and as soon as General Abacha announced himself Commander-in-Chief to the sound of martial music, he brought all the controversial privatisation programs of the Babangida government to a halt. Abacha reduced the inflation rate of 57.165% inherited from the Babangida administration to 9.96%, between 1993 and 1998.

 

However, General Abacha presided over the illegal transfer of foreign reserves and his human rights record gradually turned Nigeria into a pariah state with a collapsing economy, where rising costs of business shrank the manufacturing components of the country’s revenue base. Oil, Nigeria’s primary commodity, was priced under Abacha at an average of $17.39 per barrel, yet the country became a perpetual importer of petroleum products, as all her refineries packed up.

 

Abacha’s death led to the end of military rule, and Olusegun Obasanjo was elected President amid low oil revenue and production, weak public revenue, patchy reserves and huge external debt servicing costs. Though the price of Brent averaged $17.9 per barrel, Obasanjo however confronted the looming crisis of external debt and successfully negotiated a relief package with the Paris Club of creditors, leading Nigeria to make a payment of $12bn.

 

Noteworthy is that Obasanjo’s government enjoyed an uptake in oil pricing, as well as a series of monetary and fiscal reforms that resulted in Nigeria’s external reserves growing to hit $45bn in 2006. However, civil unrest in the Niger Delta, and post-2007 election violence created an Oil production crisis for Nigeria, with annual crude production dropping from a peak of 918.96 million barrels in 2005 to 768.7 million barrels in 2008. The consequences on the Treasury were further exacerbated when Brent Crude prices dropped from $147 to $43 per barrel in 2009. The presence of fiscal buffers such as the Excess Crude Account helped the government weather the storm, but a sharp rise in oil prices in 2010 speedily brought the economy to greater viability. Successive President Goodluck Jonathan’s government also witnessed relative oil price growth, as the hydrocarbon sold at $100 for over 42 months.

 

The hallmark of all governments since Nigeria’s return to democracy was that though the economy grew above 5%, endemic corruption (mostly through public contracts and oil subsidies) meant prosperity eluded the vast majority of the population. In 2016, under current President Buhari, Nigeria’s economy tipped into recession, largely due to Oil price slumps and a trailing off of production. Despite recent reports that Nigeria is out of recession, the country’s economy continues to suffer from its vulnerability to oil pricing, production swings and endemic corruption, as well as poor visioning that continually subvert sits potential to uplift the living standards of its citizens.

 

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