Abuja, July 6th 2020. The Nigeria Extractive Industries Transparency Initiative (NEITI) has called on the government to insulate the economy from the perennial oil price volatility by weaning Nigeria off its unhealthy dependence on oil which accounts for the bulk of its revenues and foreign exchange earnings

NEITI made the call in its latest policy brief, titled: Insulating Nigeria from Perennial Oil Price Volatility”. In the brief, NEITI urged the government to adopt sustainable strategies for robust fiscal cover for the Nigerian economy during periods of cyclical oil price shocks.

NEITI stated that “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 noted 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”.

The latest NEITI 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.

Examining the impacts of COVID -19, the brief noted 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”, the brief stated.

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 8 oil price shocks in thirty four years. 4 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. Further analysis also showed that revenue from oil export has consistently contributed over 90% of total exports revenue, indicating the dominance of the oil sector in the generation of foreign exchange.

NEITI noted that though dependence on oil is reducing, oil still accounts for about 50% of government revenues and over 80% of exports and foreign earnings which makes Nigeria highly vulnerable to oil price shocks. The policy brief advised that “Beyond surviving the latest oil price slump largely occasioned by COVID-19, Nigeria needs a sustainable strategy for coping with future oil price shocks”.

The policy brief listed three important pathways that will insulate Nigeria from this predictable but perennial challenge. First is for the country to “Maintain a robust ‘rainy day’ fund, the size of which should reflect not only the volume of revenues from mineral resources, but also the size of the national economy”. This savings fund is supposed to help Nigeria smoothen spending, form a hedge against the cyclical volatility of oil prices and keep part of the accrued benefits for the future generation among other reasons. While Nigeria has an oil savings fund, NEITI stated that the savings is too small to serve its intended purposes.

The paper however, identified challenges towards Nigeria achieving and maintaining a healthy oil savings fund. The constraints are constitutional and the difficulty in achieving centralised savings in a regime of fiscal federalism. NEITI therefore recommends that Section 162 (1) of the 1999 Constitution should be amended to mandatorily allow for part of the oil earnings to be saved; that the 0.5% stabilisation fund and the Excess Crude Account (ECA) be abolished and the balances in the accounts transferred to the NSIA; the Oil Price-based Fiscal Rule (OPFR) where revenue in excess of oil price benchmark is saved should be abolished and replaced with mandatory savings of a percentage of daily oil production. “This will remove the constant political jousting about oil benchmark price and quantity”, the policy brief advised.

NEITI also recommended that proceeds from the percentage of daily oil production should be transferred to the NSIA and the funds invested in convertible instruments while the NSIA’s stabilisation fund should be increased from 20% to 40% and dividends from its earnings shared every year.

According to the brief, increasing NSIA’s stabilisation fund and sharing the dividends from investments will give comfort to the states and LGs to support constitutional amendment and the scrapping of ECA.

The second strategy recommended by the policy brief is that Nigeria should wean itself off its dependence on oil revenue. The policy brief acknowledged the efforts of government in this direction, but noted that a lot more needs to be done in order to boost non-oil revenue and export to improve foreign exchange earnings. Increasing revenues from taxes and tariffs and boosting raw and processed agricultural and solid minerals exports are some of the strategies the policy brief put forward that could help Nigeria diversify its earnings from exports.

NEITI also pointed out that the present efforts by the Nigerian government to correct the distortions to the economic structure should be intensified. It also adds that macro-economic stability should be maintained, ease of doing business improved with incentives and reforms put in place to further attract foreign and local investors in areas where Nigeria has comparative advantage and investments in physical and human infrastructure should be increased so as to reduce the cost of doing business.

The policy brief also put forward a third strategy which is to get more from the oil and gas sector in other to aid development of other revenue and export streams. “Blocking leakages and maximising opportunities in the sector will help in increasing government revenues and the contribution of the sector to national productivity”.This can be achieved through the following: elimination of crude oil and refined product theft, fully deregulate the downstream sector and boosting gas production and utilisation. Other recommendations include: fast tracking the passage of the Petroleum Industry Bill (PIB), institutionalise transparency in the oil and gas sector as well as systematic and proactive disclosures in areas of contracts, productions, revenues, commodity trading, beneficial ownership, bid rounds and production costs, among others.

NEITI’s policy brief also recommended for a level-playing field for all operators, including Nigeria National Petroleum Corporation (NNPC) and a more deliberate strategy for boosting local refining capacity so as to reduce the pressure on external reserves from importation of refined products while positioning Nigeria to meet the refining needs of the Africa sub-region.

The publication welcomed measures already taken by the Federal Government to address the economic impact of COVID-19. Government had revised the 2020 budget, cut some aspects of the capital and recurrent expenditures, slashed revenue projections and production benchmarks; secured a $3.4 billion emergency facility from the International Monetary Fund (IMF) and augmented federation allocation with $150m which was withdrawn from the stabilization fund of the Nigerian Sovereign Investment Authority (NSIA).

Government has also removed subsidy on petroleum products and adjusted the exchange rate from N305 for $1 to N360 for $1 with a N2.3trillion economic sustainability plan put in place to cushion the various economic dimensions of the pandemic. The removal of subsidy or under-recovery on petrol, which cost the country about N9.8 trillion between 2006 and 2018, will ensure savings and availability of scarce resources for more impactful areas. It will also help curb the corruption and smuggling associated with petroleum subsidies.

NEITI commended all the measures so far put in place by government as very important steps towards minimizing the economic impact of COVID-19 crisis. The transparency agency however, reiterated the need for Nigeria to “Look beyond surviving this latest episode of a lingering malaise” According to NEITI, “It is important to use this crisis to significantly reduce Nigeria's vulnerability to regular oil price shocks and also emplace a framework for robust fiscal cover”. 

The NEITI Policy Brief is one of the agency’s policy and advocacy instruments, designed to focus the attention of policy makers and citizens on important issues in the extractive sector, especially those requiring urgent attention.

Dr Orji Ogbonnaya Orji

Director, Communications and Advocacy

In resource-rich developing countries, sharp decreases in extractives revenues are coinciding with intense and urgent healthcare spending priorities. Earlier this week an expert panel, moderated by EITI Chair Rt. Hon Helen Clark, discussed the implications of the Covid-19 pandemic, and how transparency can help countries navigate its challenges.

The economic shockwaves from the Covid-19 pandemic are being acutely felt by resource-dependent countries. While many governments are scrambling to avoid economic collapse, the virus is here to stay – and must be taken seriously. This was the message emphasised by David Nabarro, Special Envoy of the WHO Director General on Covid-19, in his opening remarks at an EITI webinar this week. The webinar was the second event in the EITI’s ‘Transparency Matters’ series.

Counting the cost

Living and working with the virus will inevitably be more costly. Production costs may increase as a result and companies will need to factor these costs into their projections. Employees in mining, oil and gas operations often work and live in close physical proximity. Extractives operations are frequently hosted in countries where public health systems are under pressure and where revenues are needed the most.

Nabarro stressed the importance of good quality community health. As economic activity restarts, the need to conserve health is often balanced against the need to restart economic activity. This trade-off is untenable, and it is important that employers – including those in extractives – advocate a more sustainable approach, argues Nabarro. “Without good quality public health to keep people safe, there is no real prospect of reopening the economy.”

Governance risks

The pandemic has brought into focus many governance risks related to the extractives sector. These were underlined by the EITI’s Executive Director, Mark Robinson. For example, commodity trades undertaken under pressure may be more vulnerable to corruption and erode revenue streams. In some countries, revenue shares allocated to regional governments may equal up to 50% of total extractives revenues. These revenue flows may be reduced as governments revise their budgets to address public sector health needs. Local communities may suffer from reduced expenditures as a result. Transparent management can help  record these variations and keep dialogue open with civil society and communities.

To better support EITI implementing countries report data that is timely and relevant in response to the crisis, the EITI has introduced new flexible reporting measures. These are designed to allow implementing countries to retain the momentum of the EITI process, while adapting to local circumstances and urgent information needs.

Managing oil price volatility in Nigeria

In Nigeria, up to 50% of government revenue and 80% of export revenue are derived from the oil and gas sector. The recent fall in oil prices has had a massive impact on public finances, with government revenues projected to shrink by 45% and GDP expected to contract 3.2%, according to the World Bank. In anticipation of its worst economic crisis in 40 years, the government has responded swiftly by revising its budget and adopting fiscal measures.

Yet according to Waziri Adio, Executive Secretary of the EITI in Nigeria (NEITI), the crisis has thrown into sharp relief the broader and more deep-rooted issue of resource dependence and volatility. “It is very clear that we need to look beyond the moment – we need to interrogate why Nigeria is vulnerable and why we are in this crisis,” said Adio. With price volatility an ongoing feature of the oil market, NEITI is advocating longer-term measures to limit Nigeria’s dependence on oil, for example by saving oil revenues and diversifying its government revenues. NEITI will be issuing a policy brief in the coming weeks on this subject.

Public information systems in Paraguay

From the perspective of the Latin American and Caribbean region, Roberto de Michele, a specialist at the Inter-American Development Bank, warned against the high toll that corruption may exert. Research indicates that up to 20% of funds intended for crisis response may never reach their intended destination.

Yet experience from Paraguay, which does not implement the EITI, demonstrates that transparency can be achieved swiftly and effectively. In less than three months, its government established a platform to track the allocation of funds to the crisis, including the disclosure of all awarded contracts. Other countries in the region intend to follow suit.

Business no longer as usual

As de Michele reminded us, “necessity is the mother of invention.” The Covid-19 pandemic may serve as a catalyst for many resource-dependent countries to evaluate their reliance on the sector and the way it is managed. This week’s webinar offered some insights into how it might help shape resilient and accountable governance. Examples from Africa and Latin America offer hope that more resilient and accountable governance models can be developed in resource-rich countries facing intense pressures from the crisis. But responsible and sustainable responses will require innovation, collaboration, transparency and swift action.

The Transparency Matters series continues in September with an event on the opportunities and challenges relating to resource-backed loans to governments and state-owned enterprises. Up for discussion is the importance of transparency on these loans for sustainable and accountable debt management.

                                                               Second EITI Webinar series: ‘Transparency Matters’

The Extractive Industries transparency Initiative (EITI) has proffered strategies that resource rich countries can adopt to cushion the effects of the COVID 19 pandemic on their economies.

One of the strategies proposed is for these countries to increase their level of transparency in the management of government finances. Executive Director of the EITI, Mark Robinson advised resource rich countries to embrace contract transparency which is an emerging trend in the EITI to protect citizen’s interests and create a level playing field that benefits countries over the long term.

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