The popular adage that says whatever goes up must come down can be used to describe the current slide in oil prices in the global market. History has again repeated itself with oil prices now at five-year low after the record drop in 2008 when prices declined to less than $40 per barrel (pb) in the aftermath of the global financial crisis.
Then, Nigeria was able to weather the storm because it had saved part of its oil windfall in a buffer account called the Excess Crude Account (ECA). Even before the current decline in oil prices, the ECA was at different times used to augment statutory allocations to the tiers of government because Nigeria’s revenue was affected by production shocks due to pipelines vandalism and oil theft.
In setting up the ECA, the Federal Government was mindful of provisions of section 162 (1) of the 1999 Constitution which states that all revenues earned must be paid into the Federation Account for onward sharing by the tiers of government. Thus, despite the benefits, the legality of the ECA is still being challenged in the court of law, and rightly so.
Notwithstanding, even critics of the ECA agree that Nigeria would have been in a worse position because of the negative shock to oil prices on one hand, and the occasional disruptions of oil production on the other. Given that crude oil will continue to be Nigeria’s main source of revenue in the short term (assuming that the non-oil sector will overtake oil sector contribution in the medium to long term), it is important that all tiers of government work towards an acceptable framework that will eliminate the ‘earn all and spend all’ syndrome. The ECA, which is a component of the external reserves, and the Sovereign Wealth Fund (SWF) are thus noble initiatives that are in line with global best practices.
There is no denying the fact, however, that the myriad of challenges facing the country requires more efforts by all tiers of government. The Federal Government on its part has been able to provide the needed macroeconomic stability necessary for growth and development. Prior to the reform era, the economy was characterised by poor GDP growth, deteriorating infrastructure and poverty and inequality. From a static point of view, one may be tempted to argue that most of these challenges are still prevalent. However, a dynamic analysis of events, especially since various reforms have been initiated and implemented under the National Economic Empowerment and Development Strategy (NEEDS), the 7-Point Agenda and currently the Transformation Agenda, the Nigerian economy has recorded improved macro stability when compared with the pre-reform era. Thus, while it is true that Nigeria is still grappling with numerous challenges, it is also factual that we are no longer where we used to be.
Putting the macroeconomic achievements in perspective and using data from the World Bank Development Indicators, Nigeria’s real GDP growth averaged 3.5 percent between 1961 and 1985 but was poor at 1.6 percent between 1986 and 1998. However, between 1999 and 2003 when reforms were put in place, real GDP growth improved to 4.8 percent and improved to 9.6 percent between 2004 and 2012 when the oil price-based fiscal rule was adopted.
In addition, the reform era in general and the regime of oil price-based fiscal rule in particular have seen moderation in the average rate of inflation when compared with the pre-reform period. While inflation rate averaged 10.9 percent between 1961 and 1985, it increased to 32.4 percent between 1986 and 1998 but declined to 11.8 percent between 1999 and 2003 and is currently at single digit. This implies that the Central Bank of Nigeria has been able to manage inflation partly due to improved fiscal prudence.
Taking the discussion further by using the standard deviation measure of volatility, the volatility of inflation was 24.3 between 1986 and 1998, dropped to 5.2 between 1999 and 2003 and then dropped further to 3.6 between 2004 and 2012. However, the volatility of the exchange rate in the reform period has been higher than the pre-reform era. This is linked to the uncertainty and speculation in the oil market which has seen the volatility in oil prices increase steadily from 2.9 between 1986 and 1998 to 4.4 between 1999 and 2003 and then to 25.5 between 2004 and 2012. Therefore, the volatility in oil prices and its attendant fiscal and monetary effects justify the creation of buffer accounts.
The macroeconomic achievements notwithstanding, Nigerians deserve better in terms of quality of life as this is the only way that the robust economic growth and macro-stability can make sense. The limitations of GDP as an indicator of welfare are well documented, leading to most development analysts referring to the Human Development Index (HDI). Nigeria ranked 152 out of 187 countries in the 2013 HDI and this is not good for a country that is at present the 26th largest economy in the world and one of the top exporters of crude oil. In addition, Nigeria’s misery index (combination of unemployment rate plus inflation rate) remains one of the highest in sub-Saharan Africa.
Translating the gains from the reforms and macro-stability to improved welfare is therefore the only way Nigerians will appreciate the efforts of government. At the federal level, a lot is happening in sectors like agriculture and transportation (road and rail) and other sectors need to step up and be counted. The sports sector, for example, can be used as a conduit to address youth unemployment by creating direct and indirect jobs. In developed economies, economics of sports is given serious attention owing to the opportunities that are present in the value chain. It is also important that quality of spending be given more emphasis and measures should be put in place to ensure accountability by Ministries, Departments and Agencies (MDAs). The state and local governments must also be held accountable as there is often the erroneous belief that everything starts and ends with the Federal Government.
Maxwell Ekor
