By Obas Esiedesa
The Nigeria Extractive Industries Transparency Initiative (NEITI) has urged the Federal Government end Nigeria’s unhealthy dependency on oil revenue to run the economy.
The agency in its latest policy brief, titled: “Insulating Nigeria from Perennial Oil Price Volatility”, held that moving the economy away from oil revenue dependency would end the country’s frequent struggles during periods of crude oil price volatility in the international market.
With two recent downturns in 2016 and early this year, NEITI has urged the Federal Government to insulate the economy by weaning Nigeria off its unhealthy dependence on oil which accounts for the bulk of its revenues and foreign exchange earnings.
NEITI called for a saving fund for the country that reflects the volume of revenue from extractive sector and the size of the economy.
It the government to adopt sustainable strategies for robust fiscal cover for the Nigerian economy during periods of cyclical oil price shocks.
According to NEITI, “Price volatility is a constant feature of the oil market, exposing oil-dependent countries like Nigeria to regular economic crises when oil prices tumble”.
It stated that though, price slumps have always been accompanied by severe pains that linger beyond the price crash, “the virus will eventually be tamed. Oil prices will go up again. So the pain of the moment shall pass. But the next slump in oil prices is not a matter of if but when”.
NEITI in the policy brief examined the impacts of Covid-19 on the nation’s economy, explored inherent dangers in natural resources dependence and recommended ways through which Nigeria can be insulated from this predictable but perennial challenge.
The report observed that the pandemic has put Nigeria’s public finances, and by extension its economy, in dire straits.
“The 2019 Corona virus disease has thrown most countries into the throes of sudden and multiple crises…exposed the inherent economic vulnerabilities of resource-dependent countries like Nigeria…This is largely due to the sudden slump in oil prices, caused by the collapse in oil demand as countries imposed lockdowns in a bid to contain the health crisis”.
On predicaments being faced by resource-dependent nations, the paper described it as “sequence of delusions, dependencies and distortions. First, the onset of resource windfall creates delusion that the country will continue to be rich from its natural resources. Then overtime, the country becomes dangerously dependent on revenues from mineral resources due to this delusion, and also because resource rents are relatively easier to earn and spend”.
The paper further explained that this dependence ultimately creates severe distortions to the economy where productive sectors become moribund as they are crowded out by the extractive sector. It noted that as an inevitable consequence, any disturbance in the flow of revenues from such resources produces an automatic threat to the economy of such resource-dependent country.
A trend analysis of oil price shocks by the policy brief covering May 1987 to May 2020 showed that the global economy had witnessed about eight oil price shocks in thirty four years. Four of these crises brought about oil price spikes namely; the Gulf War in 1990, War on Terror/ Venezuelan crises in 2005, Global economic expansion and OPEC Plus Agreement in 2018 and 2019.
On the other hand, there was a global price fall during the East Asian Financial Crisis in 1998, Global financial crisis in 2008 and 2009, shale oil production period in 2014 and recently during the Covid-19 Lockdowns in 2020.
Further analysis of total federation revenue against oil prices revealed a very strong close relationship between oil prices and government revenue within the period under review. Thus, as oil prices rise, the federation revenue also shots up; and as oil prices fall, federation revenue dwindles. A look at oil revenue as a percentage of total federation revenue showed that from 1981 to 2014, oil revenue consistently accounted for about 65% to 85% of total federation revenue.
“It is only in recent years (2015 – 2018) that oil revenue was below 60% of total revenue. And this can be attributed to low oil prices and increased efforts to boost non-oil revenue”, NEITI stated.
