The Case for a Robust Oil Savings Fund for Nigeria

Oil & Gas
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Tuesday, July 18, 2017/ 1:05PM /NEITI  

Major Highlights
To overcome commodity price volatility and depletion of non-renewable resources,countries dependent on revenues from natural resources are usually advised to save for the rainy day and for the future generation.  

Nigeria has about three decades of experience in implementing different oil revenue funds. However, attempts at oil revenue savings have been plagued by contested legal frameworks, governance issues and inadequate political will. 

Nigeria has one of lowest natural resource revenue savings in the world. The balance in the three funds (0.5% stabilization fund, ECA and NSIA) is $3.9 billion, not enough to fund 20% of 2017’s federal budget. 

Nigeria’s $1.5 billion sovereign wealth fund is one of the lowest in the world, has one of the worst ratio 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 186million 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Between 2005 and 2015, $201.2 billion accrued to ECA but $204.7 billion was withdrawn from the ECA during same period, indicating that withdrawal was 102% of deposit. 

It is clear therefore that Nigeria has no prudent and robust oil revenue savings scheme that can tie it over expected volatility of oil prices and the eventual depletion of its oil reserves in 38 years; neither does it have a strong mechanism for promoting inter-generational equity.


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. 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 is 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 was accumulated during a period of consistently high prices, as the basic fiscal rules were not observed. 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 was 37 billion barrels. At 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.4 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.



The subject of a future generations’ fund is particularly crucial in designing stabilisation funds that are both viable and insulated from the political and domestic spending pressures that have plagued a fair number of stabilisation funds around the world.  

So, beyond serving a mandatory purpose of saving revenue from a non-renewable resource for the future, the structure of a future generation fund is necessary to mitigate most of the problems that have made it difficult for Nigeria to implement a successful savings and stabilisation policy. 

Most countries that established one or more oil revenue funds have accumulated huge savings in their stabilisation accounts. On the other hand, Nigeria’s ECA has been dogged by questions about its constitutionality, which have hindered regular remittances into the account.  

But the ECA also faces governance issues bordering on transparency and failure to adhere to the fiscal rules guiding the operation of the ECA. In the end, distrust by subnational governments about the management of the fund coupled with lack of political will has prevented the government from effectively implementing its savings and stabilisation policy. 

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. 

While there are obvious institutional challenges with the operation of the ECA, the greatest impediment was the clear lack of political will to save in times of bumper earnings. Bearing in mind that oil prices continue to respond, mostly without warning, to a myriad of market and non-market events, and that another shock is always inevitable, Nigeria’s economy will remain vulnerable to these conditions even beyond the current recession. 

The federal and states governments should therefore pursue a speedy resolution of the issues at the Supreme Court to determine the legal status of the ECA and the SWF. Thereafter, the political actors should, among other interventions, proceed with necessary haste to effect amendment to Section 162 of the 1999 Constitution.  


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