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Buhari vs. oil prices and Nigerians vs. Buhari – Part 2

By Zuhumnan Dapel

09 November 2021   |   3:22 am
The 2011 election violence was a seed sown for a fragile and unfriendly investment climate which manifested itself in the run-up to the 2015 elections, four years later in which the safety of investments and capital mobility were threatened.

President Muhammadu Buhari (Photo by Adrian DENNIS / POOL / AFP)

The 2011 election violence was a seed sown for a fragile and unfriendly investment climate which manifested itself in the run-up to the 2015 elections, four years later in which the safety of investments and capital mobility were threatened. And, in search of safer havens, there was, within five weeks, a massive outflow from Nigeria of more than $22 billion – an amount more than 10 times Nigeria’s 2015 total capital expenditures. Nonetheless, brighter days lie ahead for oil-rich countries.

Signs of brighter days ahead, but what can (must) Mr Buhari do?
If the oil price sustains its recent path (which is most likely given the latest forecasts) and that the oil extraction continues at the current pace, then within the 18 months that is left of his presidency, Mr Buhari will scoop at least $100 billion (about twice Nigeria’s total external debt stocks) in revenues from the oil market. According to OPEC predictions, there are strong indications that oil prices, driven by rising global demand, will maintain a steady rise until peaking in 2035. But there is a looming threat against the global oil market: innovation. Electric vehicles to rule British highways by 2030 and a ban on new fossil fuel vehicles to follow from 2040. This is bad news for oil-producing and oil-dependent countries like Nigeria, even as a major United States company is spending $2 billion on rolling out electric car charging infrastructure across the Atlantic. There is no question that this will lead to significant cuts in world oil demand and oil revenues of oil-exporting countries.

However, as the Chief Steward of Nigeria’s Commonwealth, what will the president do with the rising oil proceeds? He has a couple of options. He could use a portion of it to discharge part of the nation’s mounting debt, thereby leaving a cleaner slate for his successors, lower deficits, defend the failing currency, finance economic progress, or feed it to corruption through unchecked government spending. Nevertheless, the ball is entirely in his courts as he has little or no contestation from the current parliament (the National Assembly or the Congress) as far as fiscal decisions are concerned because the president’s political party control both chambers of the legislative arm. Ideally, a relatively benevolent leader who would embark on oil revenue-funded sustainable levels of infrastructure investment as this is requisite to attracting foreign direct investments and consequently lowering the average cost of doing business.

Going forward: A more transparent stabilisation fund
The economic damage triggered by volatility in world oil prices and flawed economic policies has been done but the past cannot be undone. While yet the vestiges are still around, lessons from the past can be gleaned for the healing of the current economic wounds and for the prevention of future gashes.

While oil prices are certain, the government can base its budgets on future oil prices, but this is a far cry from past and current realities. Oil prices have often deviated from expectations, thereby fuelling shakiness in government finances. There are well-documented patterns of how Nigeria has over-adjusted to rising oil prices in the past. The country earned more oil revenues than anticipated. Instead of saving the difference in a stabilisation fund and using it to smooth out government expenditures and shield its local currency in periods of dwindling oil prices, it spent it. For example, Nigeria’s 2010 budget was based on benchmark oil price set around $57 per barrel. But eventually, crude oil moved $22.5 above the estimated benchmark. The difference was not wholly reflected in the nation’s foreign vault. Instead, the savings depleted from $30 billion in 2008 to less than $1 billion in 2010. There was no convincing justification for this because the nation’s currency at the time was not in crisis and the drop in the oil price was not significant enough to warrant the massive withdrawals.

However, in 2004 a stabilisation fund known as the Excess Crude Account (later renamed Sovereign Wealth Fund) was set up to hold surpluses in oil revenues. But its aim was partially defeated in that it was characterised by politically motivated investment, withdrawals without budgetary approval and riddled with controversial legal battles between the top two tiers of the Nigerian government. As a result, Nigeria’s was ranked “the second-most poorly governed fund among 34 resource-rich nations” on the Resource Governance Index.

Improving the Resource Governance Index is not out of the realm of possibility. It is achievable if powered by political will. But what can we do when those in charge of the tools – the policies and the willpower of government with which to thwart the network of dirty money – seem to be among the primary beneficiaries of the status quo?


Dapel is a former IDRC Fellow at the Center for Global Development and Public Policy Fellow at the Woodrow Wilson International Center for Scholars, Washington, D.C. Twitter: @dapelzg