... What happened with the two episodes is that we got deluded into thinking high prices would last forever, we stretched public finances to breaking point, and we saved little for the rainy day.
But there is a third episode: oil prices tumbled from a high of $147 in June 2008 to $38 in December 2008. Yes, the dip was short. But we survived that slump largely because we had reserves in excess of $60 billion, which tied us over that bust time. Interestingly, the savings were largely accumulated at a period when oil never rose above $70 per barrel, when our oil supply was constrained on account of militancy in the Niger Delta and when $12 billion was paid to get debt forgiveness. But crude oil per barrel sold for an average of $77.38 in 2010, $107.46 in 2011, $109.45 in 2012, and $105.87 in 2013. However, by the time oil prices slipped to yearly average of $96.29 in 2014 and $49.49 in 2015, we did not have the kind of cover we had six years earlier not just because we didn’t save enough but also because we had also over exposed ourselves, as will be illustrated shortly. If the time between the first and the third episodes is long enough to induce amnesia, the space between 2008 and the onset of the current slide in oil prices is short enough to remind us of the risk we are constantly exposed to. But we failed to learn.
Another known risk that turns natural resources to curses is that resource-rich countries are prone to corruption, low levels of accountability, and high incidence of profligacy. Because of the nature of resource rents, it is easier for those in authority in extractive economies (as opposed to tax economies) to corner and capture public resources and expend them anyhow. Beyond the predisposition to graft and the wastefulness, resource rents concentrate and consolidate public resources in a few hands, nurture a ruling elite more interested in private gains than the common good, foster a rentier, patronage, and predatory political ethos, fuel intense competition for power, conflicts, poverty and inequality, inverse the relations between citizens (the principals) and those in authority (the agents), and distort the interaction between state and society. All these conduce to opaque and unaccountable management of the revenues from natural resources. Even before the ongoing revelations and probes, reports by the Nigeria Extractive Industries Transparency Initiative (NEITI) had provided more than ample evidence of the mind-boggling mismanagement of Nigeria’s main source of revenue.
The other well known risk that resource-rich countries are exposed to is a dependency condition called the Dutch Disease. It manifests this way: massive inflows of foreign exchange on account of the high price of a natural resource raise the comparative value of the local currency and turn the economy into a high-cost one. This means that other sectors, like manufacturing and services, that the country can earn foreign exchange from become uncompetitive and are crowded out; and imports also become cheaper, eventually knocking off local industry. A double but dangerous dependency is thus created: the country depends solely on the natural resource for foreign exchange; and depends on imports for almost all its needs. While consistently high prices will mask the trouble, onset of low prices will burst the bubble. This is where, sadly, Nigeria has found itself today. The 1,851% increase in the price of oil between 1972 and 1980 infected us with the Dutch Disease, so much so that we depend on crude oil for 85% of government revenues and about 95% of exports. And we import almost everything, including, shamefully, refined petroleum products (which constitute about 40% of forex demands.)
This composite picture should show why Nigeria is in trouble today: little savings from a long boom time, and a 75% plunge in the price of a product that accounts for more than 80% of government revenues and foreign exchange in a country where so much revolves around government and in an import-dependent economy; fall in monthly forex earnings from $3.2 billion to about $400m sometime this year; decline in oil production from 2.2 million bpd to a little over 1 million bpd; and the growth in monthly import bill from N148.3 billion in 2005 to N917.6 billion in 2015 (519% increase). While it can be validly argued that recession could still have been averted, the oil and dollar dependence created a downward spiral: fall in the value of the Naira, cost-push inflation (since most things including industrial inputs are imported), drop in disposable incomes, which is compounded by the fact that most states are owing salaries, and the resultant negative impact on demand and ultimately on production. True, oil and gas sector now accounts for only 9% of our GDP, but our unhealthy dependence on it for government revenues and foreign exchange imbues the sector with a disproportionate heft. This we need to fix in a systematic and sustainable way.
We can easily spend our way out of this recession or bump up production in high growth areas. Oil prices and production may even rise again, making the get-out-of-recession task easier. But all these will not cure us of the oil curse. Hopefully, the present pain will permanently bury doubts about the need for a robust stabilization fund and the imperative of strengthening transparency and accountability mechanisms like NEITI. But we also need to permanently puncture the lie that we are a rich country just because we have oil. It is a trite fact that the wealth of nations is not buried under the soil. Countries become rich when their people and their companies produce value-adding, highly-sought, cutting-edge goods and services. But beyond fixing the defective structure of our economy, we also need to reinvent our politics. A governance model that is defined by extraction, sharing and consumption surely cannot lead to development. And by the way, development doesn’t happen: it is created. Rahm’s Rule should thus be our article of faith: “you never want to let a serious crisis to go to waste.” The crisis of this recession has thrown a massive opportunity our way, the opportunity for a total reset. It will be a shame if, again, we fail to seize this chance to heal our country.
by Waziri Adio