Nigerian economy vulnerable to shocks, says World Bank

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The Nigerian economy has become more vulnerable to shocks as a result of the depletion of the Excess Crude Account, according to the World Bank.

The ECA was established in 2004 to save revenues in excess of the budgetary benchmark price generated from the sale of oil, with the aim of protecting the country’s budgets against shortfalls caused by the volatility of crude oil prices.

The account was expected to insulate the Nigerian economy from external economic shocks.

The ECA rose from $5.1bn in 2005 to more than $20bn in November 2008, but during the last meeting of the National Economic Council in December 2019, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, reportedly disclosed that the balance as of  November 19, 2019 was $324.98m.

In its latest Nigeria Economic Update, the World Bank warned that a ‘moderate’ decline in oil price could trigger another recession, noting that the exhaustion of the ECA had made the country more vulnerable.

“Fiscal buffers in the Excess Crude Account have been exhausted, rendering Nigeria more vulnerable to shocks,” the bank said.

Noting that the account was mismanaged, the report added, “The ECA has rarely operated as envisaged. When it was established in 2004, it was to be drawn on only when the actual crude oil price falls below the budget benchmark price for three consecutive months.”

“However,  state governments contended that the federal Fiscal Responsibility Act of 2007 creating the ECA was not binding on state and local governments.”

The World Bank observed that the   Sovereign Wealth Fund was established in 2011 by the three tiers of government to serve as the oil savings fund for the country.

The SWF has three components – future generations, infrastructure and stabilisation funds.

The stabilisation fund, like the ECA, was to support federation revenue in times of economic stress.

“It was envisaged that the balance in the ECA in 2011 would be transferred to the SWF.”

The World Bank said, “Instead, in 2012 seed capital of only $1.5bn was transferred, plus another $0.5bn in 2017.”

The balance of the Stabilisation Account, reportedly  as of  December 17, 2019, was N30.5bn, while the Natural Resource Fund held N88.3 at the same date.

The World Bank further observed that Nigeria’s consolidated government revenue was very low by the standards of comparable countries.

“During the commodity boom Nigeria’s consolidated government revenue reached 12 per cent of GDP, among the lowest ratios for structural, aspirational and regional peers.”

It said, “After oil price and production shocks and Nigeria’s first recession in over two decades, in 2016 general government revenue plunged to six per cent of GDP – second lowest of 115 countries for which data are available.”

“Recovering to eight per cent of GDP in 2018, government revenues are projected to plateau there unless there are significant tax policy and administration reforms.”

The bank warned that the prevailing situation will continue to constrain the budget envelope and limit fiscal space for investing in physical and human capital.

In the absence of fiscal buffers such as the one that was supposed to be provided by the now exhausted ECA, Nigeria risks another recession, due to the country’s dependence on oil, the bank said.

It added, “A moderate decline in oil prices could lead to a recession in Nigeria due to its dependence on oil; the Nigerian economy is highly vulnerable to a drop in oil prices.”

“The oil sector remains the dominant source of risk for growth of Nigeria’s economy, with sustained suboptimal policy decisions aggravating the size of the potential impact on the economy.”

“For example, a sudden decline in oil prices to 2016 levels, sustained for a year, would undermine growth and fiscal balances and the lack of monetary and fiscal buffers would magnify the impact of any shock to the economy.”

“If oil prices dropped again by about 25 per cent, the country could swing into a recession, with a more difficult recovery path.”

Evaluating the possible impact of a temporary decline in oil price, the bank noted that the development could subtract up to 0.5 percentage points from growth.

The report projected,  “Yet, the indirect (spillover) effects on external and fiscal balances and the financial sector would be significant, similar to, if not worse, than what happened during the 2016 recession.”

“Since the Federal Government’s deficit is already twice the size of Nigeria’s revenues, the fall in fiscal revenues proportionate to the 25 per cent fall in oil prices would virtually eliminate space for infrastructure spending, with obvious long-term repercussions for growth.”

“With no fiscal buffers available –the Excess Crude Account balance is less than $0.5bn – and no likelihood of external borrowing as investor confidence drops because of uncertainty over Nigeria’s policy response, deficits would have to be financed domestically, sending the cost of borrowing soaring.”

“Because there are no buffers, the nonoil economy could contract by more than in 2016, with the economy as a whole shrinking by more than two per cent.”

“Recovery would be slow in the absence of structural reforms, even if the oil price rebounded by about 15 per cent as the global economy recovers.”

However, world oil prices jumped nearly $3 on Friday after the United States killed an Iranian military chief, Qassem Soleimani, a development which fanned fresh fears of conflict in the crude oil-rich Middle East.

The international oil benchmark, Brent crude, hit $69.16 per barrel, its highest since September 17, 2019, before easing to $68.81 per barrel, while the US West Texas Intermediate surged by $2.03 to $63.21 per barrel, having earlier spiked to $63.84 a barrel, its highest since May 1, 2019.

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