Oil and the Nigerian Economy: Can We Learn from Norway? By Abdulhaleem Ishaq Ringim
Whether or not Nigeria has utilized its oil wealth in a prudent manner is still a topic for national debate. However, considering how dependent the country’s economy has become on oil revenues; the shrinking of other economic and revenue generating sectors including agriculture, mining and manufacturing and the resultant unhealthy rate of economic development, most Nigerians believe Nigeria is yet another patient infected by the debilitating “Dutch Disease”.
Today, proceeds from Nigerian oil accounts for about 70% of the country’s revenue, 90% of its exports and foreign exchange but constitutes less than 10% of its GDP. This seriously exposes and makes economic prosperity wholly dependent on the ever volatile global oil price. In 2016 for example, Nigeria slumped into its first recession in two decades courtesy of global oil price crash from highs of about $110 per barrel to about $48 per barrel. In 2020 as well, Nigeria slumped into another recession courtesy of the Covid-19 induced fall in global oil price.
The above illustrations show how oil price volatility determines the direction of the Nigerian economy. This coupled with the lack of sustained prudent management of oil wealth over time have restricted the Nigerian economy from attaining its full potential and have rendered it fully susceptible to the renowned “resource curse”.
Prior to the discovery of oil, Nigeria ran an agrarian economy. Agriculture was the prime mover of the economy, it contributed about 64% of the country’s GDP; 65-75% of foreign exchange earnings and employed over 70% of the Nigerian population.
Agricultural production in the country included local crops for domestic consumption and several cash crops for export. Nigeria was basically self-sufficient as agriculture provided for about 95% of the food needed to feed the entire nation. Through exportation and sales taxes, agriculture powered the Nigerian economy as the major source of revenue. This revenue was used judiciously in developing other physical, social and economic infrastructure paving the way for efficient service delivery in health, education, power supply, water supply etc. it also powered other sectors including the mining sector, manufacturing and even oil and gas exploration.
There has always been reminiscence about the great groundnut pyramids of Northern Nigeria(Nigeria was the largest exporter); Cocoa of Western Nigeria(being the second largest exporters) and Palm kernel and oil of Eastern Nigeria.
The abundance of such crops also assured a robust manufacturing sector with industries for the production of value-added agricultural products and a relatively high employment rate.
The search for crude oil in Nigeria started as far back as 1908 at Aromi(in present Ondo State). However, oil was not found in commercial quantities until 1956 when Shell discovered massive deposits in Oloibiri of present day Delta State.
This marked a major u-turn in in the operations of the Nigerian economy. From national revenue contribution of just 0.08% in 1958 when Nigeria shipped out its first cargo of oil, and with the discovery of other oil fields and the exploration/production activities of many other international oil companies who joined in production, revenue from oil rose through 1% revenue contribution in 1960 to more than 70% by 1975 replacing agriculture as the major source of national revenue and foreign exchange. Nigeria officially became a mono-product and rentier economy which neglected agriculture, industrialization etc.
It is widely accepted by many in the country that oil revenues were largely mismanaged with special reference to the 1970s.
After the civil war, oil production and exportation surged as Nigeria discovered massive onshore and offshore crude oil deposits. As a result, Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971. The world experienced a boom in oil price in the 1970s and Nigeria as one of world’s largest oil producers benefited immensely from it (Nigeria’s earnings from crude exports skyrocketed by over 500% within 1970-1974).
During that time, the government prompted by massive oil revenue inflows embarked on extravagant spendings especially on massive non-productive projects which never ushered in commensurate national economic development.
For example, at a time, Nigeria ordered 20 million tons of cement for the execution of the large developmental construction projects the government had embarked on. The shipment was twice the unloading capacity of all Nigerian ports combined and hence, the cement could not get unloaded. Massive amount of the cement eventually lost binding capacity and became waste. This is just one out of many stories of the squandering of oil revenues.
However, things started to turn around in the 1980s when global oil prices declined and OPEC lowered Nigeria’s quota resulting in a decline of petroleum output. The economy plummeted into its first recession characterized by huge debt burden, large scale retrenchment leading to high unemployment rate, foreign exchange shortage, inflation etc. This led to two military coups and the subsequent Structural Adjustment Program(SAP) instituted by the Babangida Administration.
The economy improved in the 1990s but we still did not learn from the experience of the previous decade.
Norway, like Nigeria is also an oil producing state. Oil was first discovered in Norway in the 1960s and production started in 1971, almost a decade after Nigeria shipped out its first crude oil cargo.
However, the Norwegian view of oil and the fortunes that come along with it was entirely different from how Nigeria viewed it. In 1983, by viewing oil revenue not as a source for immediate squandering but as a “transformation of wealth, from a natural resource to financial wealth” with consideration for the future by upholding an ethical obligation to share oil wealth with future generations, the Norwegian government suggested the establishment of a fiscal buffer; a sovereign wealth fund, to ensure that oil wealth is sustainably managed for long term benefits. They knew of “Dutch Disease” and they were determined to prevent themselves from getting infected.
The fund named “Petroleum Fund”( and later Government Pension Fund Global, GPFG) was established in the year 1990 and the first transfer to the fund was made in 1996. By law, all net revenues from the oil sector were to be transferred to the fund. A fiscal rule followed in 2001 to define how much of the oil saving would be spent and how much would saved. Per the fiscal rule, it was agreed that for each year, only the expected real return from the fund should be utilized to cover “non-oil structural budget deficit” on the government budget and not the actual budget deficit.
This implies that since 2001, oil revenues have not been spent but transferred to the Sovereign Wealth Fund for investment. And only the expected real returns from the investment which is 4% per annum is allowed to be transferred back to the government budget to cover only non-oil structural budget deficit and not the actual budget deficit.
Such a policy has ensured the absolute separation of oil revenues from government spendings and budgets and saw to the fact that Norway did not spend too much money too fast. This prevented the emergence of an overheated economy, kept prices and wages at a moderate level and ensured that labor did not move from the competitive and tradable part of the economy to the “sheltered” service sector hence keeping productivity very high.
The policy also helped in insulating the government budget from the effects of the volatility of global oil price – the boom and burst cycle.
And although international oil companies dominated the production, the Norwegian government still held a significant stake and taxed the IOCs at the high rate of 78%.
By separating oil revenues from the government spendings, the Norwegian government ensured that people were “kept at work”, the value of labor was kept high constituting 81% of the Norwegian National Wealth Per Capita while Oil and Gas only holds 4%. Taxes are moderate(sometimes considered relatively high for an oil producing state). Prosperity in Norway is mainly a product of the efficiency and productivity of its people. Norway’s Employment rate remains one of the highest in the world exceeding that of the Eurozone and even the United States.
Norway also run a strong public sector with relatively higher tax rates and also a large and competitive private sector due to its good business environment ranking 9th in the world bank ease of doing business ranking, 1st in Legatum Prosperity ranking, 7th in Transparency International’s CPI and 11th in World Economic Forum’s Global Competitiveness Index.
Unfortunately, it is a different case in Nigeria as oil revenues remain the major source of funds for budget servicing(government expenditure) and global oil price determines the direction of Nigeria’s economic growth at every given time.
However, during Obasanjo’s administration around 2004, Ngozi Okonjo Iweala, the then Finance Minister and now DG of the World Trade Organization developed an oil-price-based fiscal rule that tried to create a space for oil revenue savings. The fiscal rule aimed at delinking oil price benchmark on which budgets are formed from the global market price. For example, the government could peg the benchmark at $140 per barrel during a period where the market price is at $147, the difference of $7 would then be saved.
The savings were held in an account called the Excess Crude Account(ECA) and the government through this fiscal rule was able to save $22Billion from 2004 to 2008. It is due to this saving that Nigeria was able to withstand the 2008 Global Financial Crisis without plunging into a recession as the government was able to administer a fiscal stimulus with 4.5% of our 2009 GDP using the ECA savings.
However, the savings continued getting depleted even after the effects of the crisis had warded off. The savings went down to $4billion in 2011 out of which $1billion was set aside for the newly created Sovereign Wealth Fund. The ECA saving surged upto $9billion by 2013.
Nigerian Governors most of which are ministers in today’s administration had always been opponents of such fiscal rules and had always insisted on sharing the proceeds based on the country’s sharing formula as prescribed by the constitution. They mounted pressure until the ECA was depleted down to $2.3Billion in 2014.
Consequently, oil prices plummeted and Nigeria drowned into its first recession in two decades in 2016 courtesy of lack of prudent fiscal management of oil funds.
While Norway’s Sovereign Wealth Fund, The GPFG is valued at morethan $1trn(2017) due to a fiscal rule that obligated saving and investing of oil revenues of which only financial returns from the investment could be used by the government 2001, Nigeria’s imprudently managed ECA and SWF stand at $72Million and $1.5Billion respectively.
The current realities of Nigeria’s economy are far from pleasant. It survived 2 recessions within the span of 5 years and is currently fairing with 16.47% Inflation rate, $0.0026 exchange rate, 27-30% Unemployment rate, N42Trn debt stock, 83% Debt service to revenue ratio(it was 99% in 2020 Q1) and a GDP growth of 0.11% 2020 Q4 with 1.92% contraction in real terms.
Today, global oil price has started appreciating with prices surpassing the 2021 benchmark for the Nigerian Budget, and it makes me ponder over this question, “Are there lessons we could still learn from Norway at this stage”?
Abdulhaleem Ishaq Ringim is a political and public affairs analyst, he writes from Zaria and can be reached through [email protected]
