Like Venezuela, like Nigeria

The Financial Times on February 9, 2015 published an article by Venezuelan journalist and political scientist Francisco Toro, titled ‘Venezuela’s collapse has nothing to do with falling oil prices’.

In the article, Toro presents a counter narrative to the present collapse of the Venezuelan economy, away from the “too easy” attribution to falling oil prices.

Oil prices have fallen 55 percent in the past six months and Venezuela has been badly hit but Toro fails to accept this as the real cause of the economic turmoil in Venezuela.

We draw quick parallels from Toro’s story because Nigeria, just like Venezuela, has been badly hit by the fall in oil prices – naira has been devalued twice, inflation is rising, government revenue is falling, forex reserves are down, salaries are unpaid, etc – and all have been solely attributed to the fall in oil prices.

“After all, when 95 per cent of your export earnings come from one commodity and its price drops by more than half, you’d expect a bit of turbulence, wouldn’t you?” asks Toro.

He reluctantly accepts the obvious answer is “yes”, but quickly (dis-)qualifies it with “…only if you’re not prepared”.

Toro’s argument, which we agree with, is that “oil market volatility is nothing new … [and] smart oil-dependent countries … save up during boom time, so they could have some sort of cushion during the busts”.

On this front, we note that just like Venezuela, Nigeria adopted a far-seeing reform to make sure it wouldn’t end up in the kind of situation it is in now. It was called the Excess Crude Account (ECA). But this was, as the Central Bank of Nigeria puts it, a “gentleman agreement” among the three tiers of government to save the excess oil revenue above the budgeted benchmark price.

After much agitation and litigation (still in the courts), a more formal Nigerian Sovereign Investment Authority (NSIA) was formed and reluctantly seeded about $1 billion from the ECA.

Just like Venezuela, Nigerian politicians could not see the point of huge saving in periods of rising oil prices. The ECA/NSIA became a topic of debate as ideas emerged on how “best” to use the funds for “national development”.

Just like Toro, we ask the question, “But what if” the excess savings were allowed to build as originally conceived? Between 2011 and 2014, we estimate that Nigeria would have contributed $47 billion to the ECA/NSIA. This is a most conservative estimation, which neglects returns on the funds, where invested, and so on.

To put this figure in perspective, $47 billion or N7.1 trillion is almost equal to Nigeria’s domestic debt burden (N7.9 trillion) as at December 2014. Alternatively, it is equal to the entire oil and gas revenue estimate in the 2014 budget.

So let’s be clear, just like Toro’s Venezuela, what Nigeria is going through now has relatively little to do with the vagaries of world oil markets, and everything to do with the destruction of its economic governance institutions.

“It wasn’t just foreseeable that a fall in oil prices could cause huge economic disruption, it was, in fact, foreseen,” says Toro.

So don’t let anyone tell you that falling oil prices are to blame for Nigeria’s underperformance. “It’s not low oil prices … it’s not even a lack of the foresight needed to introduce policies to prepare for low oil prices … It’s that the government inherited the mechanisms that would have prevented this catastrophe, but vandalised them for sport.”

Just like Venezuela, Nigeria’s collapse has nothing to do with falling oil prices.