Lagos — Nigeria's politicians are currently embroiled in discussions over how to appropriately manage and utilise excess profits from its oil industry. Oil is the most crucial pillar upon which the Nigerian economy depends and the country would be in poor position to weather a fall in oil prices were there to be a renewed global economic downturn.
The 2012 budget originally submitted to parliament by President Goodluck Jonathan in December 2011 provoked controversy by setting the benchmark price at $70 per barrel. Some saw this as unrealistically low and, especially given that oil accounts for 80% of national revenues, an average price of $100-110 per barrel was seen as more reasonable. By the time the budget was approved by parliament in March, the benchmark price had been increased to $72 per barrel.
Excess profits occur when the price per barrel exceeds the revenue estimate made in the budget when it is approved. If this occurs, surplus profits are held in a separate fund called the Excess Crude Account (ECA) which was established in 2004. These saved profits are then intended to be used to boost the country's revenue when oil prices are low. But the law establishing the ECA and its use has always been controversial.
Save well, spend well
After President Olusgun Obasanjo left office in 2007, Nigeria's 36 state governors emerged as a collective political force and in 2008 filed a lawsuit contesting the legality of the ECA. This dispute was never fully resolved and has recently reignited.
The state governors argue that their monthly allocations for the fund are inadequate for meeting development-related needs, and fear the arbitrary withdrawal of funds by the federal government. According to them, the fund is illegal because it gives too much power to the federal government to distribute the wealth and undermines the constitution regarding revenue distribution across the three tiers of the executive. They also contest that there is a $35 billion gap between what the ECA accrued between 2004 and 2007 and the funds they were allowed.
Earlier this year, the federal government approached the Supreme Court to discuss the possibility of an out-of-court settlement, a promise many states see as insincere. And earlier this week, the 36 governors called on the Supreme Court to bar the federal government from withdrawing $2 billion from the fund until the suit determining the account's legality is concluded.
Saving for a rainy day
The federal government, however, are reluctant to abolish the ECA or make the funds it accrues more readily available to state governments.
In 2006, robust global growth and high oil prices resulted in the ECA holding $20 billion. When the global financial crisis hit in 2008, causing global demand for oil to drop and prices to fall from $147 per barrel in early 2008 to $35 per barrel in 2009, the country was spared from debilitating budget deficits by the savings from the ECA. These spare funds helped stabilise the economy against the negative shock before oil prices rebounded after the 2009 downturn.
The governors' proposal now, however, asks for 80% of funds to be shared between the federal and state governments, leaving only 20% of revenues saved for a rainy day.
In April, Minister of Finance Ngozi Okonjo-Iweala, estimated the amount in the ECA at $3.6 billion, an amount which falls short of the projected amount. While the account's value has since risen to $4.2 billion this May, exports have been hampered by oil-bunkering, a practice whereby crude is illegally siphoned off from pipelines into makeshift vessels.
Citing figures that the ECA had been overdrawn by $16.4 billion between 2006 and this April, and highlighting the potential for price volatility, the finance minister insisted that monthly sharing of account funds with state governors would be economically unhealthy. For economic security, Okonjo-Iweala believes the account should maintain a minimum of $50 billion.
We've been here before
The continued depletion of the ECA in 2010, despite economic recovery and stronger oil prices, exposed weaknesses in the rules surrounding the fund's management. In an attempt to resolve the legal issues surrounding the ECA and protect the economy from oil price volatility, the National Assembly passed the Nigerian Sovereign Investment Authority Bill in 2011, which created an authority to administer a new Sovereign Wealth Fund (SWF).
Okonjo-Iweala argues that the enabling law setting up the SWF provides for the inclusion of governors, civil societies, and other reputable bodies to manage the fund collectively. However, securing the initial transfer of $1 billion from the ECA to establish the SWF proved difficult because of the governors' stance that all monies accruing in excess of the budget benchmark should be shared.
If the ECA and/or SWF cannot cover the shortfall that would result from a significant drop in global oil prices, austerity could result. This would not only undermine the government's Transformation Agenda, but could create a situation not unlike that of the World Bank's structural adjustment programme.
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The establishment of Organisation of the Petroleum Exporting Countries (OPEC) in the 1970s and Nigeria's ascension as a member during the era of military rule may have assured large oil revenues, but they were not used to stabilise the economy. As the country's ability to pay its loans dwindled with the cartel's power, the military government of General Ibrahim Babangida was forced to implement structural adjustment in 1986. Following reductions in government spending and devaluation of the Naira, inflation and unemployment soared.
Corruption increases uncertainty
It is crucial that Nigeria's federal government and state governors sort out the issue soon. But at the same time, it is essential - especially in the wake of the widespread corruption in the oil sector revealed by the probe into fuel subsidy payments this April - that mismanagement in the industry is also cleaned up.
Nigerians will have to hope oil prices remain buoyant until these issues are resolved.
Yemi Soneye holds a B.Tech degree in Agricultural Economics and Extension from Ladoke Akintola University of Technology, Ogbomoso, Nigeria. His poems and essays have appeared on Istanbul Literary Review, Sentinel Literary Quarterly, Saraba Magazine, The New Black Magazine, Palapala Magazine, Daily Times Nigeria and Sentinel Nigeria.
