On the crude oil revenue fiscal rule
Unless you have not been paying attention at all, you probably know that the Nigerian economy is dangerously dependent on crude oil. Not in the sense that it is the only thing we do, but there are sections of the economy that are completely reliant on crude oil. Crude oil revenues still make up about 95 percent of exports (excluding services) and still account for a significant part of government revenues. Unfortunately, the price of crude oil, and therefore subsequent revenue, is very volatile. The price has been known rise from $50 a barrel to $80 a barrel in a year and has also been known to fall from $80 to $30 over a similar period. Economists try hard to predict future prices for crude oil but the commodity super cycles, as they are fondly called, are largely unpredictable. No one really knows when the price will crash although we are certain that at some point it will.
This super-cycle reality means that governments with a strong reliance on crude oil revenue, such as ours, are advised to have a simple fiscal rule to guard against sudden drops in revenue that can happen with sudden crude oil price drops. The rule is simple: spend less when prices are high, so that you have buffers when prices collapse. In practice this means saving a bit of revenue into a rainy-day fund or some other type of structure which serves as a pool of funds when revenues collapse.
Although countries follow the rule in different ways, the fiscal rule in the past in Nigeria was implemented via crude oil price and production benchmarks that were below current prices and potential output, with any revenue above the benchmark saved in a fund. It used to be the excess crude account but there were attempts to formalize that into the sovereign wealth fund and another stabilization fund. If you’ve ever wondered about why there’s an excess crude account then now you know, although the title of the account should have given it away. Does the fiscal rule work? Yes, it does if implemented. The fiscal rule is the reason why most Nigerians outside the banking sector forget there was a global meltdown in 2008 and oil prices crashed. The Obasanjo regime built up a savings in the excess crude account that hit $22bn at some point. That fund got the government through that crisis. On the other hand, the Jonathan regime, not forgetting the role of state governors, did not follow the fiscal rule and we can see how that has turned out.
Here, we are again with oil prices back on the up. Since 2016 the average oil price has been higher than our budget expectation. The 2016 budget assumed oil would be $38 a barrel but the average oil price was $40. In 2017 our benchmark was $42.5 a barrel but the average oil price that year was about $52. We haven’t passed a budget this year, but the proposed benchmark is $45, with rumours that the National assembly may increase is to $55. The average crude oil price this year so far is $64. Our production numbers have also recovered since the lows in 2015 if sources are to be believed. Whichever way you cut it, crude oil revenues should have been exceeding the budget expectations for at least two years. Yet the excess crude account and the sovereign wealth fund have barely moved. The excess crude account is reportedly down to $1.8bn, lower than the $2.3bn it was in February. The sovereign wealth fund is stuck at about $1.5bn.
It appears we are continuing the habit of spending almost everything that comes in on the assumption that revenue will continue to come in. Keen watchers will note that this may be connected to the wild expectations of revenue from other non-oil sources. Expectations which obviously are not the reality. Be that as it may, when the next oil-price crash happens, which is surely will, excuses won’t matter much. The time to prepare for that eventuality is now when prices are higher than expected.
Of course, from a political perspective the current regime has no incentive to think about what may happen five or six years down the line. They will all probably be gone by then and a new regime will have to deal with the consequences. That is why the onus is really on the national assembly, the supposed long-term decision-making institution, to take charge and ensure that we are better prepared when the next crash happens. Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa. The opinions expressed in this article are the author’s and do not reflect the views of his employers.
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