Poor oil revenue, governance and development
For a mono-product economy like Nigeria, it is not unprecedented, therefore, that a sudden and sustained decline in the price of the product will impact the country’s revenue negatively. No wonder the former Central Bank Governor, Sanusi Lamido Sanusi, in 2011 stated that: “Our major concern is that a major decline in the price of oil or (domestic output) would lead to a massive depreciation of the currency, a collapse in reserves and a huge growth in deficits and some of the states outside of the oil-producing regions might find themselves in a situation where they are not able to pay salaries.”
Not long after the above statement, the price of oil dipped, and the economy has been thrown into a state of deficits, with the effects reverberating across other sectors of the economy. Nigeria relies heavily on crude oil revenue to fund government spending. Oil accounts for about 15% of Nigeria’s GDP but it makes up about 80% of government revenue.
It is disheartening to note that despite the positive windfall gains arising from the benchmark oil price of $79, $77.5 and $65 in 2013, 2014 and 2015 respectively, the country’s external reserves declined precipitously from $53.6 billion in 2008 to $30.9 billion as at March 2015. This declining trend in external reserves reflects the current concern of the CBN to continuously defend the Naira in the face of dwindling foreign reserves.
However, the CBN measures have become unsustainable too. Consequently, the government adopted austerity measures for 2015. These measures, including tightening fiscal and monetary policies, have adverse consequences for other sectors of the economy.
Nigeria’s economy continues to post a gloomy outlook, as the squeeze from declining oil prices and government revenue continue to reverberate through the fiscal and monetary policy framework. The attendant consequences of the naira devaluation, increase in monetary policy rate to 100 base point, increasing cash to reserve ratio are among the challenges that could undermine business activities; especially with Nigeria’s heavy reliance on imports for both consumer and investment goods. Despite producing an average of 2.38 million barrels per day in 2011 and holding the title of Africa’s largest crude oil exporter, Nigeria is nowhere near its productive potential. Ironically, Nigeria has to import refined fuel, due to its unproductive and inefficient oil refineries that operate at below 25% of name- plate capacity. Studies have shown that Nigeria could produce approximately four million barrels per day within 10 years. To do so, however, requires a more efficient use of resources and thoughtful economic management.
Below are some of the quotes from some of Nigeria’s public officers, which reflect the mismanagement of oil revenues. “We have suffered a great deal in this country, from our inability or unwillingness to manage our oil resources properly. When oil prices are high, like now, a great deal of optimism sets in and we tend to spend all that we earn to meet our admittedly tremendous need…” Dr. Ngozi Okonjo Iweala, 2004 Budget Speech.
“The challenges facing the petroleum industry today are enormous. Some of them are widespread uncertainty about the state of the on-going reforms in the industry with the non-passage of the Petroleum Industry Bill (PIB); slowdown of investments in virtually all aspects of the industry …; low growth of our oil and gas reserves; confusion surrounding the renewal of leases held by some oil companies”. Senator Emmanuel Paulker, 2012; Senate Committee Chairman on Petroleum Resources (Upstream).
In 2015, I wrote in the 2014 downstream petroleum report “Our aged national refineries have the worst capacity utilisation levels of all countries with refineries in Africa. We virtually import almost all the petroleum products we consume in Nigeria, and export all the crude oil we produce… In order to be self-sufficient in the supply of petroleum products we require a refining capacity of about 750,000 barrels per day. The implication is that we need to construct new refineries with speed, because the government cannot afford to spend the meagre revenues accruing from crude oil sales on subsidising importation of refined products.
“The emergence of shale oil and gas is a major threat to the revenues of OPEC (Organisation of Petroleum Exporting Countries) Member States, and an alert for economic diversification for all members through the auspices of their petroleum revenues. The four critical areas for diversification should be in infrastructure development, downstream petroleum sector, power sector, and in research and development.”
Regrettably, Nigeria’s foreign direct investment (FDI) inflows have been almost exclusively in the natural resources sector, specifically in the oil and natural gas industries. Such a mono-sectoral concentration in FDI limits technology transfer and inhibits job creation. However, through a conscious effort geared towards diversification of the economy, Nigeria can also diversify the distribution of the foreign direct investment it receives. Should Nigeria attract FDI in other sectors, including manufacturing, tourism, consumer products, and construction, these sectors could generate additional jobs and create a more balanced economic growth.
“Affordable energy in ample quantities is the lifeblood of industrial societies and a prerequisite for the economic development of others”. Jon Holdren, 2001
There is no doubt that Nigeria is blessed with abundant energy resources, but the challenge has always been how to utilise the revenues to diversify the economic base, particularly the power sector. Consequently, the country is plagued with the inability to generate adequate power supply for the teeming populace and the business sector. The following quote from President Obama captures the ubiquitous importance of developing a robust power sector.
“And we believe that nations must have the power (electricity) to connect their people to the 21st Century. Access to electricity is fundamental to opportunity in this age…. It is the lifeline for families to meet their basic needs. And it is the connection that is needed to plug Africa into the grid of the global economy”.
The upsurge of oil theft in Nigeria has assumed alarming dimensions. It has been estimated that Nigeria is losing between 300,000 to 400,000 barrels of crude oil per day to oil theft, pipeline vandalism and related crimes. The incessant destruction of pipelines and other oil infrastructure across the country as well as trade in stolen oil by criminal cartels with international connections have continued unabated despite Federal Government’s efforts.
Thus, oil theft and illegal bunkering activities in the Niger Delta pose a challenge that threatens the very foundation of the oil industry, and by extension, the Nigerian economy.
It is ridiculous to note that Nigeria is considered one of the top 40 most corrupt nations in the world, particularly in its dealings with the oil industry. However, by strengthening its democratic institutions, Nigeria can tackle corruption, maintain political stability and make good governance a possible.
For drastic economic development in the face of dwindling oil revenue, we must face the fact that, there are no easy options; there are only hard choices to be made.
Prof. Chijioke Nwaozuzu, a downstream petroleum economics and policy expert is the Deputy Director of Emerald Energy Institute for Energy and Petroleum Economics, Policy and Strategic Studies, University of Port Harcourt.
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