Nigeria’s Debt Crisis And Lessons From NNRC Benchmarking Report

As Nigeria’s debt balloons rapidly with foreign and domestic debt hitting $25.27 billion and N16.63 trillion respectively, as at 31st December, 2018, according to the National Bureau of Statistics (NBS), e360 presents findings and recommendations of the Nigeria Natural Resource Charter’s (NNRC) 2017 Benchmarking Exercise Report (BER). Implementation of the recommendations of the relevant Precepts in the 2017 BER can help government de-escalate the debt crisis and establish a robust savings mechanism

Balancing Savings and Consumption (Precept 7)

The NRC suggests that revenues from resource extraction can finance growth in non-resource economy and improve standards of living. It further suggests that if managed poorly, the government can squander revenues and subject the economy to economic shocks, leading to wasteful spending, poorer public and private sector investment choices, over-borrowing, debt crises and ultimately poorer human development.

Therefore, the optimal way to utilize the opportunities from resource endowment is deploy the resource revenues for present needs without compromising the needs of the future generation. In addition, natural resources are non-renewable resources and saving revenue from extraction will ensure that society effectively transit to a sustainable revenue source and eventually diversify away from oil.

The 2017 BER found that Nigeria tended towards excessive consumption. Since 2012, less than 20% of the total government expenditure has gone to capital expenditure. Also, of the $180 billion that has accrued into the Excess Crude-oil Account (ECA), a fiscal buffer established in 2004, less than $2 billion remains as at 2018. The major weakness of the ECA is the lack of appropriate legal backing especially at the subnational level. Specifically, the structure allows for indiscriminate withdrawals subject to the whims of the beneficiaries; the federal and state governments which diminishes Nigeria’s prospects of saving for its future or for other development prospects.

Zainab Shamsuna Ahmed

Zainab Shamsuna Ahmed

The Nigerian Sovereign Wealth Fund (SWF) while created on more solid legal standing, is poorly capitalized. As at May, 2018, the fund had $2billion in capital, this represents about $10.5 per person. Comparatively, Norway, Kuwait and Botswana have $185000, $148000 and $14400 per person in their respective sovereign wealth funds. With their robust savings, these countries are better positioned to absolve oil price shocks, develop critical infrastructure and develop their human capital. From the foregoing, government could better manage Nigeria’s resource revenues through:
1. Implementing a more stringent rule on deposit into the Nigerian SWF, especially establishing a stronger link between funding going into ECA and capital into Nigerian SWF.
2. State governments, especially the oil producing states, should consider establishing their respective SWF.
3. Another mechanism to improving saving is by increasing capital spending, which invariably benefits both present and future generations

Using Strong Macroeconomic Policy to respond to Oil Price Volatility (Precept 8)

Nigeria can improve the effects of oil price volatility by simply learning the lessons history has taught. The NNRC’s Benchmarking Exercise Reports have shown that the oil and gas market is characterized by a boom and bust cycle. Since 2014, oil price has shown more volatility largely to the combined effect of global geo-politics and new technology in shale oil and renewable energy. The implications of this trend for oil dependent countries are multifaceted. For instance, oil price volatility implies revenue volatility which could affect budget implementation as is especially the case for the Nigerian government which relies on the oil and gas sector for around 70% of its resource revenues. Government revenues have dropped by about 37% since 2014. The Nigerian government has tried to stabilize expenditure through deficit financing. However, the 2017 BER found that only the federal government has been able to utilize this tool to mitigate budget volatility, as majority of the state governments entered into fiscal distress and had to be bailed out by federal government.

The 2017 BER observed weak capacity to manage inflationary pressures due to oil volatility and absence of effective measures by government to efficiently manage foreign direct investment inflows to the extractive sector. Particularly, while monetary policy has responded well to mitigate inflationary pressure, fiscal policy, on the other hand, has worsened it.

The subsidy regime was phased out in 2016, but has now been reintroduced in an opaque process; re-branded ‘under-recovery’ without parliamentary checks to curtail abuses. Macroeconomic policy is essential in responding to the challenges facing the oil sector in general and government expenditure volatility in particular. First, the earlier issue raised regarding the importance of saving is equally relevant here.

It is vital for fiscal policy to be more countercyclical, which means more saving in the period of oil price boom, while drawing on the saving in the period of oil bust. In addition to this, there are other important macroeconomic considerations that can be looked into:

1. Reforms are required to the Fiscal Responsibility Act (FRA) to ensure greater fiscal compliance, especially at the sub-national levels. Enhancing the capacity of state through improving capacity for tax administration and more importantly improving their revenue base will be crucial.

2. Government should do more to stabilize exchange rate. The relative calm in forex market at present represents a positive development, but more is needed in order to close the present multiple exchange windows. Also, Central Bank of Nigeria (CBN)’s regular intervention in the forex market through dollar injection might be unsustainable with another shock to oil prices. Therefore, in the long-run, diversifying the foreign reserve portfolio through expansion of export base will be required.

3. A sustainable debt policy is needed to avoid future fiscal crisis. Debt financing no doubt can help in smoothing out revenue volatility, but there is a limit to this. It would be more appropriate with effective counter-cyclical fiscal policy in place and coordination with the monetary authority to ensure inflation is effectively controlled.


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