GUEST COLUMNIST BY WAZIRI ADIOÂ
A popular saying admonishes us not to eat with ten fingers. This axiom is not a homily about â€¨table manners. It is a metaphor about the virtue of living prudently. A more prosaic rendering willâ€¨go like this: save a portion of your earnings for the possibility of emergencies in the here and â€¨now, and for the uncertainties of the future. Or put differently, always save for the proverbial â€¨rainy day. But both poetry and prose seem to elude us.
Our country has made a habit of not only â€¨eating with its ten fingers, but also, in periods of plenty, throwing its ten toes into the mix.â€¨From data harvested from the Central Bank of Nigeria (CBN), Nigeria earned in excess of N70 â€¨trillion from oil and gas alone between 1999 and 2014. By the time prices of crude oil started â€¨plunging in mid-2014, it was (and still is) difficult to point to what we had done with that â€¨sizeable windfall. Worse, we saved little during the long boom period to minimize the impact of â€¨what has turned into a not-so-short spell of not-so-high oil prices.
Before long, Nigeria landed at â€¨a desperate pass, one where we do not have enough dollars from oil, our near-sole export, to feedâ€¨our addiction to imports, one where most states struggle to pay salaries, and one where national â€¨productivity shrank and the economy contracted. â€¨To be sure, many factors combined to produce the undesirable outcome that we are just slowly â€¨emerging from. But a few things could have turned out differently if we were not eating with ten â€¨fingers and ten toes at boom time. Imagine if we had saved between $50 billion and $150 billion â€¨in the Excess Crude Account (ECA) alone before oil prices started sliding south in mid-2014.
â€¨Having that quantum of savings in ECA is not as far-fetched as it seems. Just remember that at â€¨some point in 2008, Nigeria had $20 billion in the ECA, and this was after $12 billion had been â€¨paid to the Paris Club to get $18 billion loan reprieve, and this was much before oil prices â€¨lingered in $100+/barrel territory for four years. We could have saved a lot, if we wanted, as laterâ€¨analysis will show. But we did not. â€¨Countries that are dependent on natural resources are always advised to save a portion of their â€¨earnings.
This is a common, almost elementary, prescription for prudent management of â€¨revenues from natural resources. And it makes good sense for many reasons. One, prices of â€¨natural resources are known to be very volatile, prone to fluctuation not only across fiscal years â€¨but even within the same budget period, exposing countries dependent on them to the potentially â€¨devastating boom-and-bust cycle. Two, natural resources are non-renewable: so it makes sense toâ€¨save for the day they will be depleted. Nigeriaâ€™s oil reserve, for instance, is estimated to run out â€¨in 38 years.
On a related note, natural resources can quickly become less valuable, as alternative resources â€¨and technology can rapidly depreciate once-valuable resources. (In the 1840s, the economy of â€¨Peru prospered on the export of bird droppingsâ€”guenoâ€”but that era ended when alternative â€¨sources of fertilizer came on stream. Just think of how electric cars and other technological advances can make oil a less valuable source of energy very soon.) Another reason for saving â€¨earnings from natural resources is the need to put something aside for the future generation, as â€¨the resources do not belong to only one generation. This is the inter-generational equity â€¨argument. â€¨It also makes sense to invest earnings from natural resources to create other streams of income, â€¨to diversify and multiply the revenue base of a country, and to creatively transform these natural â€¨resources into gifts that keep giving beyond their natural lifespans. A good example of this is â€¨Norway. In 2016, the Scandinavian country earned three times more from the investment of its â€¨oil savings than it earned from the sale of oil that year.
In addition, saving natural resource â€¨earnings helps in taming the negative impact of the sudden influx of foreign exchange on the â€¨local economy (Dutch Disease, crowding out of local manufacturing, mono-cultural economy, â€¨import-dependence) and assists in limiting the disposition to fritter away and pilfer resource â€¨rents. In sum, having a robust and prudently-managed resource savings is one of the means for â€¨ensuring that natural resources become real blessings, and not curses, to resource-rich countries.â€¨From a policy paper released last week by the Nigeria Extractive Industries Transparency â€¨Initiative (NEITI), it is clear that Nigeria is aware of this simple but effective prescription. The â€¨problem, though, is that we have been more than half-hearted in our implementation.
Titled â€œthe â€¨Case for a Robust Oil Savings Fund for Nigeria,â€ the NEITI report shows that our country has â€¨three different oil savings funds: the 0.5% Stabilization Fund, started in 1989, with a current â€¨balance of $95 million; the ECA, started in 2004, with a current balance of $2.3 billion; and the â€¨Nigerian Sovereign Investment Authority (our sovereign wealth fund), started in 2011, with a â€¨current balance of $1.5 billion. The combined balance in the three accounts is $3.9 billion. â€¨It is good news that we have been saving part of our oil earnings for the past 28 years. However, â€¨our present balance is too little and too inadequate to serve our purpose in the immediate and in â€¨the future.
Between 1989, when we formally started saving part of our oil earnings and 2014 â€¨when oil prices started falling, Nigeria had sold $980 billion worth of oil. The $3.9 billion â€¨balance of our combined savings represents only 0.4% of the value of oil sold in 25 years of â€¨operating oil savings funds. We also have one of the lowest natural resource savings in the world â€¨in absolute and relative terms. The sovereign wealth funds of other countries covered in the â€¨NEITI study are as follow: Norway, $922 billion; Kuwait, $592 billion; Russia, $89.9 billion; â€¨Chile, $24.1 billion; Botswana, $5.7 billion; and Angola $4.6 billion. â€¨The comparison between Nigeria and Norway is inversely jarring. Norway has a population of â€¨5.2 million people, which is 2.8% of Nigeriaâ€™s 186 million people.
But its oil savings of $922 â€¨billion is 23, 641% of the total $3.9 billion in Nigeriaâ€™s three oil savings funds. Comparison of â€¨the two countries in per capita terms and savings as a proportion of budget further buttresses the â€¨sharp contrast: While Norwayâ€™s $922 billion comes to $185, 000 per citizen, Nigeriaâ€™s $1.5 â€¨billion sovereign wealth fund (NSIA) amounts to $8 per citizen; and while Norwayâ€™s $922 â€¨billion can fund 37 years of the countryâ€™s budget, Nigeriaâ€™s $3.9 billion in the three oil saving funds can pay for only 16% of the N7.44 trillion federal budget for this year (it should not be â€¨forgotten that the money does not belong to the federal government alone). The fact that our totalâ€¨savings cannot fund up to a fifth of a yearâ€™s budget at the federal level should serve as serious â€¨wake-up call. It shows how vulnerable we are as a country and how our half-hearted approach to â€¨savings makes a mockery of and undermines the need for oil savings in the first instance. â€¨Some will say a comparison with Norway is unfair, and maybe it is.
Excuse can be made for howâ€¨Norway is a developed country that does not need its oil revenues and can afford to save all. It â€¨can also be said that Norway is a smaller country, where three in five of the citizens work and â€¨pay taxes and without the huge developmental challenges that we have. But there are serious â€¨lessons we can learn from not just Norway and other countries cited in the NEITI study, but also â€¨and especially from our own experience. Truth is we did not manage most of our oil savings in a â€¨transparent, accountable and prudent manner, especially in moments of significant high oil â€¨prices.
â€¨Two instances will suffice. One, 2010 was one of the few years when both the price and the â€¨volume benchmarks were lower than the actual price and the actual production figures. This was â€¨a year we did not need to draw down on the ECA at all because Section 35 of the Fiscal â€¨Responsibility Act of 2007 says that there should be withdrawals only when actual price falls â€¨below the benchmark price. But a report of the National Economic Management Council (NEC) â€¨cited by NEITI shows that while inflow to the ECA was $10.9 billion, outflow was $15.9 billion,â€¨resulting in a negative net balance of $5 billion.
Also, the NEC report shows that while $201.2 â€¨billion accrued to the ECA between January 2005 and June 2015, $204.7 billion left the account â€¨during the same time, indicating that outflow was 102% of inflow. Imagine that instead of our â€¨save-and-spend attitude, a conscious decision was made to save between 25% and 75% of the â€¨ECA accruals. That would have left a balance of between $50.3 billion and $150.9 billion in â€¨ECA alone.
More than a mere academic, counter-factual exercise, this shows the road not taken. â€¨To be sure, there are binding constraints to having a robust oil savings fund in Nigeria, ranging â€¨from governance, developmental, conceptual to constitutional. The NEITI paper took account of â€¨all of these and made some recommendations, chief of which are the following: settling the casesâ€¨between the states and the federal government at the Supreme Court, consolidating all the funds â€¨into the NSIA (which is better structured and governed as a resource savings fund), saving even â€¨oil prices are low (Angola saves 100,000 barrels of oil per day), delinking budget from oil, â€¨creating incentives for savings, implementing complementary macro-economic policies, and â€¨amending Section 162 of the 1999 Constitution.
â€¨Some of these might look daunting, but not necessarily so if the will is there, as President â€¨Olusegun Obasanjo and late President Umaru Yarâ€™Adua clearly demonstrated in building up the â€¨ECA. It is even possible to save when oil prices are low: the present administration added $500 â€¨million to the $1 billion seed money to NSIA by the President Goodluck Jonathan administrationâ€¨â€”$250m in November 2015 and another $250 million in March 2017. Both the ECA and NSIA were products of elite political consensus. Same consensus can be built upon to amend the â€¨constitution using the inclusive platform of NEC. Though it should be clear by now that eating â€¨with ten fingers puts everyone at risk, having a consensus on that, whether at the elite level or at â€¨the national level, is not a naturally occurring phenomenon. It has to be consciously shaped and â€¨midwifed. That is one of the critical leadership tasks of these testy times.