By Antoine Heuty, RWI Senior Economist
During the last International Monetary Fund-World Bank fall meetings, Professor Chukwuma Soludo, Governor of the Central Bank of Nigeria, warned that Nigeria's savings from the oil windfall have been depleted and may not be able to play a counter-cyclical role if the financial crisis further depresses oil price below the Federal budget benchmark. The combination of the downturn in oil prices and the depletion of the excess crude account illustrate the need for strengthened resource revenue and public expenditure management at the federal, state and local level in Nigeria.
In 2004, Nigeria adopted a fiscal rule that allocates oil revenues according to a formula based on the budget oil price and volume of production. Oil revenues in excess of the budget oil price and production level are transferred into the “excess crude account” at the central bank in the names of the various government entities. High oil prices and compliance with the fiscal rule have resulted in the rapid accumulation of savings which amounted to $17 billion (16 percent of non-oil GDP) at the end of 2007 (see graph below).
Source: IMF (2008)
This rule de-linked fiscal spending at all tiers of government from oil revenue fluctuations. The International Monetary Fund Article IV 2007 (pdf) concluded that "fiscal spending has been contained during the oil boom to manage demand pressures." The table below illustrates Nigeria’s prudent fiscal policy stance between 2004 and 2007.
Nigeria institutionalized this approach through a Fiscal Responsibility Act (2007) that prescribes procedures for setting a macroeconomic and medium term expenditure framework at the federal level. The Fiscal Responsibility Act is only limited to the federal government and requires that all states pass fiscal responsibility legislation to ensure better fiscal coordination. In September 2007, a political agreement was reached under which all states would pass such legislation. The federation account committee agreed that 1 trillion naira (about $8.5 billion) be set as a target for the excess crude account. Eighty percent of all excess revenue would then be shared among the three tiers of government, and twenty percent would be saved. The agreement also included the allocation of $5.6 billion to improve the country’s electrical grid and power infrastructure.
However the Money Market Association of Nigeria reported that 1.723 trillion naira (about $14.7 billion) has already been shared by the three tiers of government from the excess crude oil account from May to July 2008. Although the distribution of oil savings is fuelling short-term economic growth, it raises a number of challenges for Nigeria’s economy as the financial crisis grows and oil prices continue to decline. Among these are:
1. Weak public expenditure management. The large infusion of funds outside the regular budgetary process is unlikely to favor productive investment and may create inflationary tensions.
2. Pro-cyclical fiscal policy. The massive injection of resources in the economy already projected to grow at 9 percent in 2008 may jeopardize macroeconomic stability and undermines the government’s ability to respond to the consequences of the financial crisis and the fall in oil and gas prices. The federal government has already reduced the oil price benchmark from $62 to $45 for the 2009 budget proposal, which implies a 30 percent reduction in spending. The depletion of the oil savings account undermines the possibility of a counter-cyclical fiscal policy and limits the government’s ability to respond to the consequences of commodity price volatility and the consequences of the world economic crisis.
3. A more pronounced declined of oil prices below the oil price benchmark for the 2009 budget would create an important stress on Nigeria’s public finances. Since political pressures have prevented the approval of the Federal Budget for 2008, legislative approval of a “crisis” budget for 2009 is likely to prove difficult.
The depletion of the oil windfall account re-emphasizes the need for all states to pass fiscal responsibility legislation to smooth expenditures and avoid the adverse consequences on commodity price volatility. States' commitment to pass fiscal responsibility legislation has been gained at the expense of a violation – albeit temporary – of the fiscal rule established in 2004. Although fiscal responsibility laws are currently being considered in a number of states, legislation has only been passed in the Kwara and Delta States. Swift legislative action and actual enforcement will be critical to ensure Nigeria does not suffer from increased volatility and lower oil prices.
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