Oil price rebound: Avoiding mistakes of the past

When oil prices begin to rise as they have been doing in the last couple of months, particularly in the last few weeks, my heart begins to palpitate. Last week, oil prices crossed the $70 per barrel landmark in a steady recovery from $28 dollars low it hit in January 2016. Not because I play in the industry and so could be getting excited that more cash and more profit will be flowing in. My trepidation comes from the fact that my nation would soon get high on petro-dollar and head right back to its past practice of profligacy. From 1967 when the 6-day war between Israel and Egypt led to the first significant rise of oil price and the several rounds of oil boom since then and the inevitable corresponding bursts, Nigeria has shown a frightening inability to optimize the often un-budgeted income.

In 1973 the Yum-Kippur war or the Arab-Israeli war ignited a major growth in oil prices, resulting in high levels of unanticipated income for Nigeria. This was just a few years after the Nigeria-Biafra war, when the country should have been using the increased income flow from the heightened oil price to rebuild the extensive damages caused by the civil war especially in the Igbo heartland, the nation went on a binge of importation and expenditure that yielded little strategic benefits to the economy. It was at this time that the Head of State in power who had earlier played to the gallery by announcing the three ‘Rs’- Reconciliation, Rehabilitation and Reconstruction declared to a bemused world that” money was not our problem, but how to spend it”. Yet the only investment made for the 3 Rs was the 600,000 pounds given to Ukpabi Asika, the administrator of the then East Central State. The evidence of the oil boom was the Udoji awards, the ‘cement armada’, the ‘ flour armada’ and the clogging of our ports with all manner of imports. Subsequent boom instigated by the Iran – Iraqi war in 1979-80 led Nigeria away from the path of industrialization and took us to the dizzying heights of official corruption which peaked during the reigns of Shehu Shagari, Sani Abacha and has remained almost at that level since then.
When Olusegun Obasanjo returned in 1999, he was thoroughly troubled by Nigeria’s lowly position in the corruption perception index (CPI), compiled annually by the Transparency International (TI). He tried to address the twin problems of corruption and Nigeria’s susceptibility to the vagaries of an oil economy- today you are so rich and tomorrow you are so poor. He realized that the bane of our boom and burst economic cycle which mimicked the rise and fall of oil prices in the international market was essentially that we ate up all we earned with no thought for tomorrow. Working with Okonjo-Iweala he set up the Excess Crude Account (ECA) which compelled the nation to save. It was this saving that helped Nigeria not to go into recession during the 2008-2010 global economic crisis that saw commodity prices crashing- oil price plummeting from a record peak of $147.42 per barrel in June 2008 to $32.40 per barrel in November 2008. Oil prices recovered from 2010, reaching another peak of $106 dollars per barrel in June 2014 before the last burst. But in 2014- 2016, we did not have similar buffer as not much was left in the ECA for sundry reasons including profligacy, corruption and the staunch opposition to the excess crude account by the governors forum led by Chibuike Amaechi.
Many Nigerians saw what a recession looks like recently and share my prayers and wishes that we do not see another one in our lifetimes. It is on this basis that I offer my suggestions to the government on how to optimize the excess income from crude sales which have begun to flow into the treasury

Legislate the excess crude account
One of the reasons the governor’s forum opposed the excess crude account was that it was not known to the constitution. To avoid another round of contestations, we should now enact a law or include it in the ongoing constitutional amendments. In addition to institutionalizing this salutary compulsory savings mechanism, an enabling law will also spell out how the funds can be disbursed. The recent approval or permission or donation of $1billion dollars to the FGN to fight the insurgency in the Northeast raised issues. The law should spell out what the money should be used for and the process of disbursement. And by the way, let me appeal to the National Assembly not to revise the oil price benchmark for 2018 above the 45-47 dollar per barrel already agreed in the MTEF document. They must resist every temptation and pressure to do so, I beg.

Invest 50% in the sovereign wealth fund
50% of all excess income should be invested in the Sovereign wealth fund. This will serve at least two good purposes. As an investment it will yield income to the federation which can be deployed for other purposes in the future. Second, the invested funds will promote economic activities in the country, increasing national productivity, creating jobs and reducing poverty levels. Hopefully, someday in the future, we will find the good sense to emulate Norway which invests its total income (not just excess) from oil sales in a sovereign wealth fund and only utilizes the dividend or interest earned in funding its development activities. Here credit must go to Okonjo-Iweala and Jonathan for pushing through with establishing the Nigerian Sovereign Investment Authority (NSIA), despite steep opposition from the ‘conservative progressives’

Invest significantly in critical economic/social infrastructure
A significant part of the excess income should be put into critical transportation infrastructure- roads, railways, and airports. Nothing motivates investment-domestic & foreign as good transportation infrastructure. It is embarrassing that after several years of exploration and exportation of crude oil, Nigeria cannot boast of a good network of serviceable all season roads. Now that we have decided to modernize the old and build entirely new standard gauge rail lines across the nation, I strongly recommend that we take a chunk of the expected excess income to bring these rail projects to life soonest. The largely suspended renovations of many of our airports need to be specially funded from this cache.
In addition to these critical physical economic infrastructure, we need to make special intervention in two areas of social infrastructure- healthcare & education. Let us at least devote some resource from this round of the oil boom to build one or two world-class hospitals that will help stop this national embarrassment of flying out Nigerians-high and not so high abroad for simple health examinations and procedures. Beyond the associated capital flight, Nigeria’s image is damned. We must determine to change the narrative in this season.

Support agriculture & manufacturing to become export oriented
It is true that on paper, Nigeria’s economy can be said to have become fairly diversified. Oil that at one time contributed nearly 42% of Nigeria’s GDP now contributes less than 15%. Agriculture that at one time was almost 50 of GDP is now about 20%. Manufacturing that stagnated at about 4% for many years is nearly 10% today. All these are cheering news. But the problem is that oil is still providing 90% of the foreign exchange needs of the nation while manufacturing and agriculture are net consumers of foreign exchange. Our challenge therefore is to get our agriculture and manufacturing to yield foreign exchange through exports. The federal government must intensify its current focus on improving the global competitiveness of the real sector so that we can truly diversify the sources of our foreign exchange earnings and halt our cyclical exposure to the global oil price fluctuations. The government must use part of the excess income to incentivize export in a consistent and sustainable manner.

Reduce growing debt overhang
It is appalling that just a few years after liquidating our debt through the great work again done by Obasanjo and Okonjo-Iweala, Nigeria’s debt profile is once more inching up and actually getting to the dangerous zone. Yes, our total debt to GDP ratio is much below the international threshold of 30% and so may not cause any alarm but when we note that our annual debt servicing provision has reached 33% of annual income in the 2017 Budget, the red flag rises. Internationally acceptable threshold is 20-25%. This 33% of revenue is not sustainable, more so when our hope to pay interest and capital is hinged on the volatile crude oil sales. In the last three years we have sought for loans from everywhere especially from China and the time to take a pause may just be around the corner. Thus we may have to use part of the excess income to reduce our debt. It may be true that some of the loans were obtained on concessionary terms and may make economic sense to keep them but we may have to liquidate or replace some of the more expensive ones, including our growing appetite for borrowing from the local domestic market through treasury bills and bonds, with its attendant adverse impact on the private sector borrowing. If we must keep these loans or determine that we must take more, then we may increase the proportion of the excess income invested with the sovereign wealth fund. The point is that we must ensure that we have the right investments to provide the cash flow to meet the debt obligations as they mature to avoid returning to Egypt.

Mazi Sam I. Ohuabunwa OFR
sam@starteamconsult.com