Fiscal recklessness has reached its pinnacle with the depletion of the Excess Crude Account to a pitiable $71 million. In a now familiar pattern, within a mere month, the Federal Government raided the already atrophied buffer from $324.96 million in mid-January to mid-February 2020 and the country is left without effective fiscal buffers even as global oil prices drop and debts and the cost of governance spike. After the ECA has been messed up, it is time to shut it down and instil sound fiscal management in public finance.
The routine has been the same since 2010. When state representatives gathered for the monthly Federation Account Allocation Committee meeting recently, they were informed that only $71.81 million was left in the account. Shortly after, the Finance Minister, Zainab Ahmed, explained that the President, Maj. Gen. Muhammadu Buhari (retd.), authorised the draw-down to the consternation of the 36 state governors.
ECA was established by the Olusegun Obasanjo administration with a visionary aim: when prices of crude oil are above the national budget benchmark, the marginal revenue would be placed in the ECA. It would then come in handy to be drawn down to support the finances of the federal, state and local governments when oil prices fall below the benchmark for three consecutive months. Sixteen years after its establishment, the ECA has never achieved its noble objective of providing a cushion for the three tiers of government. It is no longer relevant.
While the Obasanjo administration that conceived it built it to $22 billion on leaving office in mid-2007, its successors immediately began raiding the fund even as oil prices moved up. As Chukwuma Soludo, governor of the Central Bank of Nigeria when the account was created, explained, that the government started saving when crude prices hovered at $30 per barrel.
But on assumption of office, the government of Umaru Yar’Adua bowed to pressure from state governors to approve the sharing from the money to support their treasuries even though oil prices were higher and rising. Yar’Adua’s acquiescence reportedly drained the account to less than $10 billion by December 2009 and the leak became a floodgate under his more profligate successor, Goodluck Jonathan. From the initial $2 billion he authorised in February 2010 to be shared by the three tiers, frequent withdrawals, some without the knowledge of the states, were to plunge the ECA to just above $400 million by the time he left office in May 2015.
Nigeria’s public finances are in a mess, lacking orderliness or buffers, weighed down by debt and leaking like sieves. But sustainable economic growth, according to Jean-Claude Trichet, a former president of the European Central Bank, depends on sustainable public finances. “Fiscal buffers are essential when our economies are in a typical business cycle,” he stressed. While all economies need them, those like Nigeria’s that depend on primary commodities that are subject to price volatility, for their survival need even more. But irresponsible fiscal behaviour had left the country exposed such that it had nothing to fall back on when hit by a recession between 2016 and 2017. Another looms as oil prices continue heading south and the global economy contracts; the country could be in deeper trouble with nothing to fall back on except more borrowing.
Just as the Petroleum Development Trust Fund and the Ecological Fund were raided and used for purposes outside of their stated objectives, the Buhari regime, like Yar’Adua’s and Jonathan’s, has been drawing from the ECA for “security,” petrol subsidy, elections and others. Ahmed confessed that over N1 trillion was withdrawn for security operations in the North-East between 2017 and 2019. Between January 2012 and December 2018, N6.48 trillion was withdrawn and only N4.7 trillion transferred into it. Governors kicked once when $1 billion was unilaterally removed by the Federal Government, which it claimed was used to “fight terrorism.”
Another flaw is that funds from the ECA never go through the normal process of appropriation, thus allowing the President, governor or LG chairman to spend unbudgeted public funds without legislative approval. This helps oil the massive corruption machinery that drains over 40 per cent of all public expenditure as estimated by the US Department of Commerce.
The country floats dangerously without a fiscal life jacket. The foreign reserves are barely $36.2 billion amid warnings from the CBN and the IMF that the Nigerian Sovereign Wealth Fund created eight years ago with $1 billion seed money, stands at $1.5 billion. It is abysmally low when compared to its OPEC peers like Libya ($66 billion), Kuwait ($592 billion), Qatar ($328 billion), and newcomer Angola ($5 billion), while Norway’s over $1 trillion is the world’s largest.
Kuwait’s hefty SWF enabled it to underwrite the devastation of the Iraqi invasion and occupation of 1990/91 and to weather fiscal deficits in 2015/16; Algeria has its $50 billion plus SWF to fall back on to combat its current deficits.
But Nigeria’s ECA has since lost its meaning as a buffer against revenue shortfalls. In any event, it is not backed by law and runs against the constitutional provision that all revenue accruable to the government be remitted to the Consolidated Revenue Fund. The Presidency and the governors have killed it; it should be buried.
As the saying goes, “A fool and his money are soon parted.” But many countries are acting wisely by saving for the rainy day. Globally, effective wealth management has become an important public sector responsibility. And placing commodity revenue in a SWF is one of the viable measures to avoid boom/bust cycles by accumulating adequate international assets. If anything, SWF actions have shown that they can play a shock-absorbing role in global financial markets, at least in terms of dampening short-term market volatility. This is the way to go.
Norway offers an excellent example of how not to be a fool. Its Government Pension Fund Global, as it is formally known, invests Norway’s revenue from oil and gas in stocks, bonds and real estate abroad in order to avoid overheating the domestic economy and to save as much wealth as possible for future generations. As of the end of 2019, it owned about 1.5 per cent of the world’s listed equities.
The NSWF should be built up; the government should stop raiding it. Kuwait’s was set up in 1953; Norway’s in 1967; and Angola’s in 2012 like Nigeria’s. It is now almost $5 billion. The federal and state governments need to imbibe fiscal discipline, drastically cut down their bureaucracies and their luxurious lifestyles, and create investment-friendly environments to stimulate productive activities and job opportunities.