Whether or not Nigeria has utilized its oil wealth in a prudent manner is still a topic for national debate. However, considering how dependent the country’s economy has become on oil revenues; the shrinking of other economic and revenue generating sectors including agriculture, mining and manufacturing and the resultant unhealthy rate of economic development, most Nigerians believe Nigeria is yet another patient infected by the debilitating “Dutch Disease”.
Today, proceeds from Nigerian oil accounts for about 70% of the country’s revenue; 90% of its exports and foreign exchange but constitutes less than 10% of its GDP. This seriously exposes and makes economic prosperity wholly dependent on the ever volatile global oil price. In 2016 for example, Nigeria slumped into its first recession in two decades courtesy of global oil price crash from highs of about $110 per barrel to about $48 per barrel. In 2020 as well, Nigeria slumped into another recession courtesy of the COVID-19 induced fall in global oil price.
The above illustrations show how oil price volatility determines the direction of the Nigerian economy. This coupled with the lack of sustained prudent management of oil wealth over time have restricted the Nigerian economy from attaining its full potential and have rendered it fully susceptible to the renowned “resource curse”.
Prior to the discovery of oil, Nigeria ran an agrarian economy. Agriculture was the prime mover of the economy; it contributed about 64% of the country’s GDP; 65-75% of foreign exchange earnings and employed over 70% of the Nigerian population.
There has always been reminiscence about the great groundnut pyramids of Northern Nigeria (Nigeria was the largest exporter); Cocoa of Western Nigeria (being the second largest exporters) and palm kernel and oil of Eastern Nigeria.
The abundance of such crops also assured a robust manufacturing sector with industries for the production of value-added agricultural products and a relatively high employment rate.
The search for crude oil in Nigeria started as far back as 1908 at Aromi(in present Ondo State). However, oil was not found in commercial quantities until 1956 when Shell discovered massive deposits in Oloibiri of present day Delta State.
This marked a major u-turn in the operations of the Nigerian economy.
It is widely accepted by many in the country that oil revenues were largely mismanaged with special reference to the 1970s.
For example, at a time, Nigeria ordered 20 million tons of cement for the execution of the large developmental construction projects the government had embarked on.
Norway, like Nigeria is also an oil producing state. Oil was first discovered in Norway in the 1960s and production started in 1971, almost a decade after Nigeria shipped out its first crude oil cargo.
However, the Norwegian view of oil and the fortunes that come along with it was entirely different from how Nigeria viewed it. In 1983, by viewing oil revenue not as a source for immediate squandering but as a “transformation of wealth, from a natural resource to financial wealth” with consideration for the future by upholding an ethical obligation to share oil wealth with future generations, the Norwegian government suggested the establishment of a fiscal buffer; a sovereign wealth fund, to ensure that oil wealth is sustainably managed for long term benefits. They knew of “Dutch Disease” and they were determined to prevent themselves from getting infected.
The fund named “Petroleum Fund”( and later Government Pension Fund Global, GPFG) was established in the year 1990 and the first transfer to the fund was made in 1996.
By law, all net revenues from the oil sector were to be transferred to the fund. A fiscal rule followed in 2001 to define how much of the oil saving would be spent and how much would saved. Per the fiscal rule, it was agreed that for each year, only the expected real return from the fund should be utilized to cover “non-oil structural budget deficit” on the government budget and not the actual budget deficit.
This implies that since 2001, oil revenues have not been spent but transferred to the Sovereign Wealth Fund for investment. And only the expected real returns from the investment which is 4% per annum is allowed to be transferred back to the government budget to cover only non-oil structural budget deficit and not the actual budget deficit.
Such a policy has ensured the absolute separation of oil revenues from government spending and budgets and saw to the fact that Norway did not spend too much money too fast. This prevented the emergence of an overheated economy, kept prices and wages at a moderate level and ensured that labor did not move from the competitive and tradable part of the economy to the “sheltered” service sector hence keeping productivity very high.
Unfortunately, it is a different case in Nigeria as oil revenues remain the major source of funds for budget servicing(government expenditure) and global oil price determines the direction of Nigeria’s economic growth at every given time.
However, during Obasanjo’s administration around 2004, Ngozi Okonjo Iweala, the then Finance Minister and now DG of the World Trade Organization developed an oil-price-based fiscal rule that tried to create a space for oil revenue savings. The fiscal rule aimed at delinking oil price benchmark on which budgets are formed from the global market price. For example, the government could peg the benchmark at $140 per barrel during a period where the market price is at $147, the difference of $7 would then be saved.
The savings were held in an account called the Excess Crude Account (ECA) and the government through this fiscal rule was able to save $22 billion from 2004 to 2008.
It is due to this saving that Nigeria was able to withstand the 2008 Global Financial Crisis without plunging into a recession as the government was able to administer a fiscal stimulus with 4.5% of our 2009 GDP using the ECA savings.
However, the savings continued getting depleted even after the effects of the crisis had warded off. The savings went down to $4 billion in 2011 out of which $1 billion was set aside for the newly created Sovereign Wealth Fund. The ECA saving surged upto $9 billion by 2013.
Nigerian Governors most of which are ministers in today’s administration had always been opponents of such fiscal rules and had always insisted on sharing the proceeds based on the country’s sharing formula as prescribed by the constitution. They mounted pressure until the ECA was depleted down to $2.3 billion in 2014.
Consequently, oil prices plummeted and Nigeria drowned into its first recession in two decades in 2016 courtesy of lack of prudent fiscal management of oil funds.
While Norway’s Sovereign Wealth Fund, The GPFG is valued at more than $1trn(2017) due to a fiscal rule that obligated saving and investing of oil revenues of which only financial returns from the investment could be used by the government 2001, Nigeria’s imprudently managed ECA and SWF stand at $72 million and $1.5 billion respectively.
Today, global oil price has started appreciating with prices surpassing the 2021 benchmark for the Nigerian Budget, and it makes me ponder over this question, “Are there lessons we could still learn from Norway at this stage”?
Abdulhaleem Ishaq Ringim is a political and public affairs analyst; he writes from Zaria and can be reached through [email protected]
