Blog (2)

And, sadly, it came to pass. It is well predicted that most countries blessed with natural resources, even in the best of times, perform worse economically than countries not so endowed; and that, when times are tough, countries that are dependent on natural resources come to an assured grief. There is a popular name for this strange but common condition: resource curse. It sounds metaphysical, it seems counter-intuitive even, but it is a position supported by enough evidence. And there can’t be better evidence than this: a Nigeria that is in the choke-hold of economic recession right after fifteen years of consistently high oil prices and over N70 trillion of oil revenues earned by the federation.

A recession might be a dramatic inflection point, but the brutal fact is that our country has never really been in sound economic health. A long spell of rising oil prices in much of our over four-decade addiction to oil had put us on a permanent high, masked the hollowness of our economic well-being, blind-sighted us to the dangers dancing in plain sight, and induced a costly work-avoidance in our leaders. Now that we are at this terrible pass, it will be tempting to just focus all our energy at getting growth back to positive zone. Without a doubt, getting out of recession should be the first order business. But doing only that will show us up, again, as a people eternally incapable of learning. This should be the time to finally wean ourselves of the unhealthy dependence on crude oil for most of our exports and government revenues; a time to reset the foundations of our economy and even of our politics; a time to get a permanent cure for what deeply ails us.

Clearly, natural resources do not come embedded with supernatural curses, as the positive experiences of Norway, UAE, Malaysia and Botswana have shown. But it is also clear how natural resources end up as blights, and not blessings, just as it is clear what to do to reverse the curse. So the problem is not lack of knowledge. The problem is that resource-endowed countries either do not do enough to prevent the sad prophecy from fulfilling itself or do not do enough to ‘cure the curse’ after it has manifested. And these countries fail to take both preventive and curative measures because countries blessed with natural resources are prone to certain risks and disposed to certain choices that create delusions, dependencies and distortions, which inexorably turn natural resources to impeders, rather than enablers, of development.

One known risk is that the prices of natural resources fluctuate. This creates revenue instability for countries that depend on resource rents to fund their budgets. Since this is known, the sensible thing would be for such countries to save enough when the prices are up as insurance against when the prices are down, and to use the windfall to create other more stable streams of income and to invest in the productive capacities of their people. But most resource-dependent countries rarely do that, as a surge of easy money induces the delusion of everlasting riches. Such countries get unreasonably high when prices of their natural resources are high and set themselves up for an inevitable fall when prices inevitably tumble.

Three episodes in four decades of our history provide good illustration. In 1972, a barrel of crude oil sold for a yearly average of $1.82. By 1974, oil price leapt to $11 per barrel, then to $29.19 in 1979, and then to $35.52 in 1980. But by the time the price of oil marginally dropped to $29.04 in 1983, our economy was already in trouble. It is important to look at the figures again: we were not in trouble when oil was $1.82 in 1972, but we were in a deep mess eleven years later when oil was $29.04.

A second episode: at the outset of democracy in 1999, oil sold for less than $20 per barrel (in actual fact, our Brent sold for a monthly average of $15.23 in May 1999) . In the 15 years between 1999 and 2014, oil prices rose steadily (except for 2008/2009), soaring to almost $150 per barrel at a point. However, by the time oil prices fell just below $100 in September 2014, we were on the way to distress district, close to the dark place we were just thirty years earlier. It is important to underscore this again: when oil was selling for $20 per barrel we got by but when it started selling for a little below $100, it was another season for weeping and gnashing of teeth, with most states and even the federal government struggling to pay salaries. What happened with the two episodes is that we got deluded into thinking high prices would last forever, we stretched public finances to breaking point, and we saved little for the rainy day.

But there is a third episode: oil prices tumbled from a high of $147 in June 2008 to $38 in December 2008. Yes, the dip was short. But we survived that slump largely because we had reserves in excess of $60 billion, which tied us over that bust time. Interestingly, the savings were largely accumulated at a period when oil never rose above $70 per barrel, when our oil supply was constrained on account of militancy in the Niger Delta and when $12 billion was paid to get debt forgiveness. But crude oil per barrel sold for an average of $77.38 in 2010, $107.46 in 2011, $109.45 in 2012, and $105.87 in 2013. However, by the time oil prices slipped to yearly average of $96.29 in 2014 and $49.49 in 2015, we did not have the kind of cover we had six years earlier not just because we didn’t save enough but also because we had also over exposed ourselves, as will be illustrated shortly. If the time between the first and the third episodes is long enough to induce amnesia, the space between 2008 and the onset of the current slide in oil prices is short enough to remind us of the risk we are constantly exposed to. But we failed to learn.

Another known risk that turns natural resources to curses is that resource-rich countries are prone to corruption, low levels of accountability, and high incidence of profligacy. Because of the nature of resource rents, it is easier for those in authority in extractive economies (as opposed to tax economies) to corner and capture public resources and expend them anyhow. Beyond the predisposition to graft and the wastefulness, resource rents concentrate and consolidate public resources in a few hands, nurture a ruling elite more interested in private gains than the common good, foster a rentier, patronage, and predatory political ethos, fuel intense competition for power, conflicts, poverty and inequality, inverse the relations between citizens (the principals) and those in authority (the agents), and distort the interaction between state and society. All these conduce to opaque and unaccountable management of the revenues from natural resources. Even before the ongoing revelations and probes, reports by the Nigeria Extractive Industries Transparency Initiative (NEITI) had provided more than ample evidence of the mind-boggling mismanagement of Nigeria’s main source of revenue.

The other well known risk that resource-rich countries are exposed to is a dependency condition called the Dutch Disease. It manifests this way: massive inflows of foreign exchange on account of the high price of a natural resource raise the comparative value of the local currency and turn the economy into a high-cost one. This means that other sectors, like manufacturing and services, that the country can earn foreign exchange from become uncompetitive and are crowded out; and imports also become cheaper, eventually knocking off local industry. A double but dangerous dependency is thus created: the country depends solely on the natural resource for foreign exchange; and depends on imports for almost all its needs. While consistently high prices will mask the trouble, onset of low prices will burst the bubble. This is where, sadly, Nigeria has found itself today. The 1,851% increase in the price of oil between 1972 and 1980 infected us with the Dutch Disease, so much so that we depend on crude oil for 85% of government revenues and about 95% of exports. And we import almost everything, including, shamefully, refined petroleum products (which constitute about 40% of forex demands.)

This composite picture should show why Nigeria is in trouble today: little savings from a long boom time, and a 75% plunge in the price of a product that accounts for more than 80% of government revenues and foreign exchange in a country where so much revolves around government and in an import-dependent economy; fall in monthly forex earnings from $3.2 billion to about $400m sometime this year; decline in oil production from 2.2 million bpd to a little over 1 million bpd; and the growth in monthly import bill from N148.3 billion in 2005 to N917.6 billion in 2015 (519% increase). While it can be validly argued that recession could still have been averted, the oil and dollar dependence created a downward spiral: fall in the value of the Naira, cost-push inflation (since most things including industrial inputs are imported), drop in disposable incomes, which is compounded by the fact that most states are owing salaries, and the resultant negative impact on demand and ultimately on production. True, oil and gas sector now accounts for only 9% of our GDP, but our unhealthy dependence on it for government revenues and foreign exchange imbues the sector with a disproportionate heft. This we need to fix in a systematic and sustainable way.

We can easily spend our way out of this recession or bump up production in high growth areas. Oil prices and production may even rise again, making the get-out-of-recession task easier. But all these will not cure us of the oil curse. Hopefully, the present pain will permanently bury doubts about the need for a robust stabilization fund and the imperative of strengthening transparency and accountability mechanisms like NEITI. But we also need to permanently puncture the lie that we are a rich country just because we have oil. It is a trite fact that the wealth of nations is not buried under the soil. Countries become rich when their people and their companies produce value-adding, highly-sought, cutting-edge goods and services. But beyond fixing the defective structure of our economy, we also need to reinvent our politics. A governance model that is defined by extraction, sharing and consumption surely cannot lead to development. And by the way, development doesn’t happen: it is created. Rahm’s Rule should thus be our article of faith: “you never want to let a serious crisis to go to waste.” The crisis of this recession has thrown a massive opportunity our way, the opportunity for a total reset. It will be a shame if, again, we fail to seize this chance to heal our country.

By Waziri Adio

New Strategy Needed for the PIB

Blog Monday, 30 January 2017 13:08

By December this year, the Petroleum Industry Bill (PIB) would have clocked sixteen years and eight months in the making, and more than eight and half years since it was first presented to the National Assembly. That would have been two hundred months of several committees constituted for the purpose, of countless stakeholder consultations and engagements, of endless back and forth between the executive and the legislature.

By then, according to a Policy Brief recently published by the Nigeria Extractive Industries Transparency Initiative (NEITI), the PIB would have gone through four presidents, five presidential terms and five legislative tenures - without resulting in an overarching petroleum industry law.

Given the importance of the petroleum sector to Nigeria's economy and the enormity of the problems that has plagued the country's oil and gas industry over the years, there can be no justifiable excuse for the embarrassing impasse on the PIB. Add to these the fact that Nigeria's oil industry does not exist in isolation but operates in a global environment that is constantly shifting in favour of countries with the most competitive instruments, it becomes obvious that the country has continued to wallow in the kind of luxury that it can ill afford, especially at a time like this.

The global market is changing rapidly, exacerbating old threats and creating new ones. The world's largest consumers have become top producers and top importers have begun to export.

But the new threats do not however lie only in far away Alaska or the South China Sea. They are also showing up on our very door step. Two months ago, Ghana passed its Petroleum Production and Exploration law. According to Ghana's energy minister, "the new law would create an attractive environment for potential investors by providing certainty and transparency in the ground rules for operations".

If the pool of investment dollars was limitless, such development would hardly merit a glance. But it is not. According the NEITI Policy Brief (titled The Urgency of a New Petroleum Sector Law), international oil companies are increasingly channeling investment funds to “other viable oil and gas projects across Africa including Ghana Senegal, Mozambique, Kenya, Uganda and Tanzania etc.”

The sad tale around the PIB rigmarole is not just the sixteen years that it has languished in limbo. The real story is that every additional year of waffling on the bill compounds the losses and worsens the problems of the sector and Nigeria’s economy. NEITI estimates that more than $200 billion has been lost in planned investment and projected returns on investment in the last eight years of delay on the PIB, as well as thousands of jobs. These figures appear very conservative. Other estimates, including a recent study conducted by the Natural Resource Charter, a policy think tank, put the losses at more than twice the figure.

Whatever the numbers, there is no question that Nigeria’s current economic problems would have been avoided if the opportunities were taken in the relevant sectors of the economy, including (and especially) the oil and gas sector. Most estimates of loss of investment due to the delay in enacting a petroleum industry law relate to the upstream sector. But the volume of domestic economic activity lies in the downstream and midstream subsectors. According to OPEC data quoted by NEITI, Nigeria has the least contribution of oil to total GDP ratio among OPEC member countries. This corresponds with data on the country’s refining activity as a ratio of total crude production. Only 3% of Nigeria’s oil is refined domestically.

Appropriate legislation to incentivise midstream and downstream investment would have reversed this massive imbalance. The fact that legislation did not happen has produced huge consequences. In five years alone (2011 – 2015), Nigeria spent more than $26 billion importing refined products. The double effect of lost domestic production and acute import dependency forms a significant part of the explanation for the country’s current economic troubles.

Swift action on the PIB would undoubtedly catalyse Nigeria's recovery. Continuing to delay the passage of the PIB not only robs the country of this important opportunity, it would ensure that the bleeding continues.

The comparative swiftness with which Ghana produced its petroleum industry legislation should serve as both reminder and a warning. In less than two years after the bill was presented to the Ghanaian parliament, it was signed into law. Ghana became an oil producing nation in 2010, one whole decade after Nigeria initiated the process that produced the PIB. Ghana may be a relatively less complicated case, but a petroleum industry law is not the genome project. It is simply a political process. Politics is supposed to be about negotiation and consensus, not about endless stalemate.

Nigeria’s weakening global competiveness and the current recession should provoke a sense of urgency and rouse the political actors to action. So far, it has not.

The lack of progress on the PIB has been attributed largely to differences over issues like the host community benefits, the powers of the minister, the fiscal provisions etc. But the fact that these disagreements have been allowed to weigh down the PIB is because there has been lack of political leadership to moderate these differences and to drive the bill from conception through legislation. Due to the absence of political leadership, the different political actors have engaged in a manifestly unproductive contest over control of the process. Rather than focus on the core objective of petroleum industry reforms, the actors have resorted to endless political gamesmanship to secure the greatest advantage for their respective constituencies.

These were never the objectives of petroleum industry reforms. In the end both the nation and its constituent parts have suffered the consequence of stalemate. The zero-sum approach has yielded no winners.

Current attempts to revive the PIB do not look promising. For one it is not clear who is leading the process, or even that the executive and legislature are working in concert, with several bills being mentioned. It is hard to see how this enhances the chance of success.

Fortunately, everyone agrees that the petroleum sector in is desperate need of reforms, and that the PIB is a crucial piece of legislation. But, experience has shown that this is not sufficient. A more important consensus at this point would be to agree on what should be done differently this time. According to the NEITI policy brief, all actors first need to remember that corruption, lack of transparency and accountability and general poor governance of the sector were the main reasons for reforms in the first place. Secondly, precious time is being needlessly expended on starting the process from the scratch every time a new regime decides to revive the process.

But most importantly, the president should take charge of the process, not just because his position confers on him the responsibility to do so, but because his political mandate, secured on the platform of transparency and accountability, stands him in good stead to rally stakeholders around the core objectives of the PIB. There can be little contention in this regard.

NEITI proposes a formal instrument for facilitating this consensus. The publication also called for a clear roadmap and a communication strategy.

But the strategy is not the only thing that needs to change. The process has to be conducted with greater haste. The costs are mounting, and the the impact increasingly more severe.

Price volatility in the oil market is an ever present reality. But this up-and-down swing need not always translate into a boom and bust cycle for the economy. A petroleum industry law, complemented with relevant reforms in the management of oil revenue, can and will help ensure that it does not.

And the law does not need to be perfect, or a panacea. It just needs to be passed, and with the urgency that it demands.

By Godwin Okpene

Where to find us?

Address
4th Floor, Murjanatu House,
1, Zambezi Crescent, Off Aguiyi Ironsi Street, Maitama, Abuja.
Phone Number
+234 9 2905984
+234 9 2906623