In 1960, according to World Bank data, the average price of a barrel of crude oil was $1.63; the next year, it was even lower at $1.57 progressively declining to $1.21 by 1970, the first year that oil prices rose in over decade closing 1972 at $1.87. Prices began to move upwards in 1973 reaching over $4.00 and by 1974 when OPEC power was becoming manifest, oil shot above $10 for the first time ever reaching $13. In 1979 the year General Obasanjo handed power to the civilian NPN regime of President Shehu Shagari, oil prices started a new high crossing $20 and then $30 and peaking at $40.75 in November 1979. That month, Brent Oil, equivalent of Nigeria’s Bonny Light peaked at $42 per barrel; then market glut set in as high prices prompted over supply and market weakening. The point here is that there is no inevitability or guarantee about high oil prices and the commodity, like others, obeys the economic laws of demand and supply.
The oil glut stopped our seven year post-civil war oil party (1973-1980) resulting in weakening prices and by 1981 prices dropped to around $33 per barrel; by 1983 below $30; and by 1986 prices crashed to between $9.62 and $15.92! Nigeria’s second experiment at democracy had multiple afflictions-weak leadership by Shagari and his colleagues; vicious competition by the second republic political parties; corruption and drift; and ambitious generals waiting not-too-patiently for them to fail; but it was simply additional bad fortune that it was under civilian rule that the oil glut happened! The government made a half-hearted attempt at “austerity” but the political class was not going to reduce their appetite for greed and conspicuous consumption. There was insufficient sophistication to understand the link with exchange rates as Nigeria operated a fixed exchange rate system with a CBN that fixed not just exchange rates, but interest rates, sectoral lending, bank branch expansion, and even bank opening hours! The only mechanism the administration could conjure was an import license regime by which civil servants and ministers for commerce and industry determined how scarce foreign exchange would be rationed with the consequence that those officials became very rich!
Nigeria would stumble from one administrative mechanism for sharing diminishing foreign exchange to another-the economically inept Buhari-Idiagbon regime even tried “counter-trade” euphemism for “trade by barter” which resulted in even greater fraud than import licensing! By 1986 when oil prices collapsed, the country had exhausted all tricks and different constituencies charged with rationing foreign currency had become lucky millionaires-ministers, civil servants, central bankers, economic planners, soldiers etc. and when Babangida finally devalued the Naira in 1986 through his Structural Adjustment Programme, the responsibility for FX allocation was moved to bank treasurers and bank owners, who predictably became very wealthy!!!
In this first experience of oil price volatility for a dependent economy, Nigeria suffered because one, it had not accumulated savings during boom years, a principle that ancient Egypt’s expatriate economist and finance minister, Joseph understood as far back as Biblical times; secondly the country did not curtail spending in the advent of lean times, as politicians and soldiers struggled to enrich themselves irrespective of the nation’s adversity; the third problem was that the country operated an exchange rate structure which encouraged imports and penalized exporters and being a fixed exchange rate system did not allow currency price flexibility (the only rational mechanism known to economic management) modulate demand and supply for scarce foreign currency through adjustments in currency value. Even when devaluation started in 1986, significant FX subsidies remained and a dual exchange rate system emerged with widely divergent official and parallel market rates. Huge incentives therefore remained for anyone with access to the treasury to grab official reserves which had significantly higher value on the streets. Nigeria’s fourth and eventually most devastating failing was a consequence of the second factor-if your income falls, and you are unwilling or unable to adjust your expenditure downwards, there can be only one outcome-you incur debt, become bankrupt, or both! With the country unable to adjust its currency to reflect economic realities; and refusing to curtail spending, foreign reserves were quickly depleted and then we started borrowing. The matter was worsened because Nigeria’s finance ministry and CBN did not have institutional structures to control external borrowing by states enabling state governors resort to international borrowing so the gravy train could continue. President Obasanjo has been heard to lament one example-a $12million loan for a fictional carpet factory was obtained by one handsome second republic governor; while the debt became part of Nigeria’s unserviceable and growing debt burden, no factory was ever built!
We duly became a debtor nation and needed a second oil boom; more prudent management of economic resources; and debt forgiveness by the overseas creditors before the Nigerian economy could enjoy a better lease of life. Meanwhile as national insolvency lasted, our banks couldn’t confirm letters of credit; we endured a scarcity of “essential commodities”; our country stopped receiving foreign direct investment (except in oil and gas); and many economic sectors, with the exception of banking whose privilege it was to administer the foreign exchange subsidy, remained sub-optimal or comatose.
*Note* The article title was changed slightly from last week. While the oil glut and price declines started in 1980, the “crash” occurred in 1986. The series concludes next week.
Opeyemi Agbaje
