ECA and the Collapse of Nigeria’s Financial Buffers
As Nigeria’s Excess Crude Account tumbled from $35.37million to $376,655 within a month, at a period when the economy is gasping for breath, analysts say all hands must now be on deck to avoid a total collapse of the economy, reports Festus Akanbi
In the realm of ideas and conjectures by the government’s image launderers, the Nigerian economy is too resilient to go under, even if it does, there are mechanisms in place to ensure it stages a dramatic recovery as the current administration begins to wound down in a few months.
However, in reality, economists argued that it will take a miracle to insulate the economy from collapse because presently, Nigeria’s economy is buffeted from all angles by acute revenue shortfall, frightening level of insecurity, fear of indiscriminate political spending as campaigns for the 2023 elections loom, foreign direct investors’ flight, high inflation, serious dent to the naira value and the unrestrained sabotage to oil production.
The uncertainty over Nigeria’s case is worsened by the shocking depletion of what would have been a veritable buffer in this unusual time, the Excess Crude Account (ECA), which tumbled from $35.37million in June to $376,655 this month.
The reality of the nation’s pathetic financial situation came as a shock to many Nigerians last week when a communique issued at the end of the Federation Account Allocation Committee (FAAC) meeting for July 2022 indicated that the balance in Nigeria’s Excess Crude Account (ECA) has reduced significantly from the $35.7 million it was as of June 2022 to $376,655.09 as at July 25, 2022.
Interestingly, no immediate explanation was given for the huge drop in the ECA. The slump in the account came as allocation to the federal, state, and local governments increased by N121.624 billion as FAAC shared a total sum of N802.407 billion for June.
However, in a late response to public outcry, the federal government on Wednesday explained that the $35million disbursement from the ECA was from June 2022, it was an advance payment for the purchase of brand new Offshore Patrol Vessels (OPVs) for the Nigerian Navy, as part of efforts to consolidate on maritime security gains recorded in the Gulf of Guinea.
Excess Crude Account
ECA, according to Governor Nasir El-Rufai of Kaduna State is described as a part of an administrative arrangement to save for a rainy day. Established in 2004, the ECA’s primary objective is to protect Nigeria’s planned budgets against shortfalls caused by the volatility of crude oil prices. By detaching government expenditures from oil revenues, the ECA is aimed to insulate the Nigerian economy from external economic shocks. It seeks to protect public expenditure from being patterned on the boom-and-bust cycle of the international oil market.
The ECA is funded by the difference between the market price of crude oil and the budgeted price of crude oil as contained in the government’s appropriation bill.
Despite its good intentions, the ECA has been riddled with controversy, allegations of corruption, and uncertain performance. This is because the status of the account is not made public regularly. Sometimes in 2015, former President Olusegun Obasanjo had claimed that his administration left $25 billion in ECA, a figure that was dismissed by Goodluck Jonathan’s administration which claimed to have met $9.43 billion in that account.
However, some state governors had opposed the plan to save the excess fund from crude oil sales because they believed that the saving was meant for immediate distribution to all tiers of government.
While speaking at the annual meeting of the International Monetary Fund and World Bank in 2016, Ngozi Okonjo-Iweala, a two-time finance minister credited with the setting up ECA in 2004, had said there was no political will to save excess crude revenue under Jonathan, blaming governors in particular.
“We tried it in Nigeria, we put in an oil price-based fiscal rule in 2004 and it worked very well,” she said.
“We saved $22 billion because the political will to do it was there. And when the 2008/2009 crisis came, we were able to draw on those savings precisely to issue about a five per cent of GDP fiscal stimulus to the economy and we never had to come to the bank or the fund.”
The Nigeria Sovereign Investment Authority
As savings in ECA continues to deplete, the federal government is taking solace in the Nigeria Sovereign Investment Authority which manages the Nigeria sovereign wealth fund, into which the surplus income produced from Nigeria’s excess oil reserves is deposited. This sovereign wealth fund was founded to manage and invest these funds on behalf of the government of Nigeria. The fund was established by the Nigeria Sovereign Investment Authority (Establishment, etc) Act 2011, signed in May 2011, and commenced operations in October 2012. It is intended to invest the savings gained on the difference between the budgeted and actual market prices for oil to earn returns that would benefit future generations of Nigerians. The fund was allocated an initial $1 billion in seed capital, and an additional $0.60billion has been contributed to date by the current administration. In December 2021 the fund had $ 2.56 billion in assets under management.
Governors’ Opposition to ECA
At a point, the ECA became a political tool in the hands of state governors who decided to determine how and when to spend the savings. For instance, in February this year, the Nigeria Governors’ Forum (NGF) said it would dedicate portions of the excess crude account, natural resource development fund, and the economic stabilisation fund to provide support for the procurement of necessary military equipment to address the insecurity challenges in the country.
However, Rivers State Governor Nyesom Wike was opposed to the withdrawal, saying he was not in support of the plan for a fresh withdrawal except Rivers State is given its 13 per cent share from the account.
Economists explained that opposition to the retention of the crude oil account by the NGF came to a head in 2012 when the state chief executives opposed deductions from the excess crude accounts to offset fuel subsidies. It criticised the continued deduction of oil subsidy from the excess crude accounts, saying the deduction negated the principle of federalism and budgetary provision.
A Vulnerable Economy
Now that the ECA has been stripped bare, the fear is that the Nigerian economy will become more vulnerable to election spending and the penchant for any outgoing administration not to pay attention to details.
Already the burden of rising deficit spending is giving cause for concern with analysts warning that the incoming administration may spend the better part of the next four years looking for ways to ease the burden of the debt payment.
In an interview granted THISDAY last year, the International Monetary Fund’s Resident Representative for Nigeria, Mr Ari Aisen, raised the need to maintain buffers given the volatility of the international prices of crude oil, Nigeria’s main export.
Aisen maintained that in terms of the question of crude oil prices, it would be difficult to say what level of prices would be enough to allow Nigeria to stay afloat. According to him, that is simply because oil prices are very volatile; hence, it rises and drops unpredictably sometimes.
He pointed out that Nigeria is not the only country facing instability in the oil market, maintaining that, the important question is what countries can do to become more resilient to its impact. “In my opinion, there are two important factors to tackling this: Firstly, do not depend entirely on one sector to increase the options for revenue,” he said.
Arien said factors such as government deposits, and building international reserves, can enhance economic resilience and enable it to stay afloat.
“There is also a need to create buffers so that in good times, savings can be made; so that in bad times, those savings can be deployed to help. Many countries have put together Sovereign Wealth Funds which accumulate in good times so that when the bad times come, they can be deployed to help the economy stay afloat. So, I would say that building buffers and having a more diversified economy can help Nigeria overcome some of the volatility and macro-issues it is facing.
Given the paucity of funds in the Nigerian Sovereign Fund and the near depletion of the Excess Crude Account, one cannot dismiss the fear from certain quarters that the Nigerian economy is vulnerable. Government cannot do much to save the situation until the unrealistic policy of fuel subsidy and other revenue-gulping ones are dropped. A government facing a protracted university crisis and the attendant threat by organised labour cannot make headway unless drastic action to save costs is put in place. When this will happens will depend on the incumbent administration.