Experts Advise Excess Oil Proceeds be Spent on Infrastructure, Savings


Kunle Aderinokun

Crude oil prices have been on the rise for some time and are expected to maintain the upward streak for a while. Brent crude surged to $80 per barrel recently, a level never achieved since 2014. Increased geopolitical tensions in the Middle East, plunging Venezuelan production, and the return of United States’ sanctions on Iran, which are expected to keep exports lower amid tighter market, have been adduced as some of the factors causing the rise in the oil prices.

Analysts have predicted that the black gold would be sold for $100 per barrel in 2019, if these prevailing factors become more manifest or have overarching effects on the oil market.

Taking cognisance of the rising fortunes of oil, the major revenue earner for Nigeria, the National Assembly, which passed the 2018 appropriation bill recently after increasing expenditure by N500 billion, to N9.12 trillion, had predicated the oil price benchmark on $51 per barrel, up from $45.

The 2017 budget, which would cease to run on June 5, was based on an oil price benchmark of $44.5 per barrel. Brent crude currently hovers around $80 per barrel, with the likelihood of rising higher, thus, translating to oil boom for Nigeria and other oil exporting countries. The fund in the excess crude account, which totalled $1.8 billion as at April 23, is expected to swell with continued rise in oil prices.

The International Monetary Fund, which had foreseen what is happening today and the future, had at this year’s spring meetings of the Bretton Woods institutions cautioned Nigeria and other oil exporting countries to utilise the opportunity created by the prolonged stability in crude oil prices to reform their economies. IMF said the countries would not be so lucky, if crude prices plunge again.

According to the Economic Counsellor and Director of the Research Department, IMF, Maurice Obstfeld, who spoke at the launch of the World Economic Outlook, the IMF had been warning for a while that the current cyclical upswing offered policymakers an ideal opportunity to make longer-term growth stronger, more resilient, and more inclusive.

Obstfeld had pointed out that the “present good times” would not last for long, stating that “sound policies can extend the upswing while reducing the risk of disruptive unwinding”. He urged policymakers in Nigeria and other oil exporting countries to rebuild fiscal buffers, enact structural reforms, and steer monetary policy “cautiously in an environment that is already complex and challenging.”

Responding to the IMF, Minister of Finance Kemi Adeosun had assured that Nigeria already had a plan to take advantage of the opportunities provided by the upswing in crude oil prices to rebuild fiscal buffers against a rainy day.

“We are going to use this opportunity to rebuild our fiscal buffers. Oil prices are positive, but we are going to continue to keep our benchmark conservative to allow us to rebuild reserves so that we don’t have any reversal in our growth direction. And to do that, we must continue to focus on domestic revenue mobilisation.” Adeosun had noted.

Nevertheless, economic experts and market analysts have offered suggestions on what to do with the excess proceeds accruing from crude sales in the light of the continued rise in prices.

Director-General, West African Institute for Financial and Economic Management (WAIFEM), Professor Akpan Ekpo, said, “The rise in oil price resulting in improved reserves is both a blessing and a challenge (not a curse).”

Noting, however, that dependence on an exogenous source of revenue to finance development is not sustainable, Ekpo stated, “The surge should be seen as a windfall and utilised as such.”

According to the professor of Economics, “The revenue should be ploughed into funding infrastructure in the country. I am referring to power, road (new construction, repairs and maintenance) and railways. Furthermore, our debt-servicing is too high; hence it may be necessary to reduce the debt burden. It is also important to make some savings for the rainy day through putting some of the windfall in the sovereign wealth fund.

“Finally, efforts to diversify the economy away from oil must continue unabated. We must change the structure of the economy to that of production and earn revenue, including foreign exchange from sources other than oil. Windfall or not.”

Similarly, Director and Sub-Saharan Africa Economist, Renaissance Capital, who is also Head of Research, SSA Yvonne Mhango, advised, “Investing the windfall oil revenue in infrastructure would support efforts to diversify the economy, to limit its vulnerability when the oil price cycle turns.”

Mhango said, “Saving some of the windfall revenue would also help smooth government spending, when oil revenues do fall.”

CEO, Global Analytics Consulting, Tope Fasua, who recalled, “We’ve seen in times past that we cannot set store on crude oil prices,” cautioning, “Just as the prices are again on the rise, they could crash as easily.”

Fasua argued, “On one hand we are borrowing massively, so we cannot advise that we save the proceeds and just keep admiring fat balances that are countered by even more massive borrowing.” He advised the federal government thus, “I believe we should use the proceeds for targeted projects to be coordinated by the federal government through the states and down to the local governments.

“The government should put the money in the hands of Nigerians by creating sustainable jobs for the youths. Our next phase of development will actually come from the ground up. This is another opportunity to do the right thing. An aspect of the windfall should be leveraged for critical, bankable infrastructure.”

To Director, Union Capital Market Limited, Egie Akpata, the budget benchmark of $51 per barrel seems conservative based on the oil price today. But, Akpata said, “The budget is based on assumed output that is substantially higher than the current 2.07 million barrels per day being produced.”

He argued, “Effectively, the accretion to excess crude account might not be as high as expected.”

Akpata believed in an ideal world, the excess funds should go into the sovereign wealth fund for very long-term, profitable investment. “Other responsible oil exporters have sovereign wealth funds that are large enough to be called upon in times of need. Nigeria Sovereign Investment Authority has to get the funds to grow to become materially large.”

He added, “In the grand scheme of things, a few billion dollars accretion to ECA is no longer as crucial as it was in the past. With the magnitude of borrowing in the current budgets, the government technically succeeds in spending the ECA even before the money is saved. It is pointless to claim to ‘save’ when you are borrowing more than you save.”

Corroborating Akpata, CEO, The CFG advisory Limited, Adetilewa Adebajo, said, “We have set up a sovereign wealth fund with clearly defined objectives. It’s high time we funded it adequately and developed something similar to the Norwegians to cater to the next generation of Nigerians.”