NEITI Urges FG To Cut Reliance On Oil In Post Covid-19
By TAYO ELEGBEDE
Amidst oil price volatilities occasioned by the coronavirus pandemic, Nigeria Extractive Industry, and Transparency Initiative (NEITI) has asked the federal government to wean the country of the unhealthy dependence on oil and also develop other areas of the economy for fresh revenue streams.
The agency in its new policy brief to curb imminent price crash in post-COVID-19 said the government should use the COVID-19 crisis to significantly reduce the country’s vulnerability to regular oil price shocks and also emplace a framework for a robust fiscal cover.
The agency in its new policy brief, ‘Insulating Nigeria from Perennial Oil Price Volatility’, states that as more countries ease or end lockdowns and return to a semblance of normalcy, the demand for and the price of oil are projected to increase, and this will give Nigeria and other oil-dependent countries more fiscal wriggle room.
It noted however that this could distract them from the important work of ensuring that resource abundance does not create dependence and distortion that always make Nigeria vulnerable to fall in prices that it has little or control over, adding that getting distracted or opting to just muddle through will amount to work avoidance.
NEITI explained further that Whether oil prices recover quickly or slowly, the next oil price crash is a matter of when, not if, hence the time to prepare for that is now.
“Oil prices have been falling since January 2020, with a particularly steep decline from March. While average oil prices were $64.35 per barrel in 2019, the average price from January 2, 2020, to June 2, 2020, was $40.16 per barrel. These averages mask the actual fluctuation in daily prices. The lowest oil price recorded in 2019 was $53.23 per barrel on January 3, 2019. On the other hand, prices have been as low as $9.11 per barrel in 2020 (April 21). Such drastic changes in oil prices are symptomatic of the global oil market, characterized by the famous boom-bust cycles, with periods of relatively stable prices followed by either rapid spikes or rapid declines in prices,” the report added.
The virus as mentioned in the document will eventually be tamed, and oil prices will go up again, therefore curing the pain of the moment. “But the next slump in oil prices is not a matter of if but when, because between 2008 and 2020, a period of 12 years, the world has witnessed three major meltdowns in oil prices: 2008/2009, 2014-2016, and 2020.”
Noting that the price slumps have always been accompanied by severe pains that linger beyond the price crash hence the task, therefore, is not just for Nigeria to recover from the economic effects of the coronavirus pandemic/current price crash, but to escape the burden of a lifetime affliction.
The report maintained that countries that are heavily reliant on commodity exports for the bulk of their government revenue and foreign exchange earnings are particularly susceptible to the vagaries of international commodity markets. Thus, Nigeria, where oil earnings have accounted for a large share of foreign exchange earnings and where oil revenue constitutes the bulk of government revenue has been at the mercy of oil market volatilities for over four decades.
Price volatility, the document continued is a constant feature of the oil market, exposing oil-dependent countries like Nigeria to regular economic crises when oil prices tumble, but beyond surviving the latest oil price slump largely occasioned by COVID-19, Nigeria needs a sustainable strategy for coping with oil price shocks.
Ordinarily, resource-dependent countries like Nigeria should save in a period of high prices in anticipation of a price slump. But they rarely do so, instead go on a high when prices are high, then come to assured grief when prices shrink.
In view of this, NEITI urged Nigeria to follow positive outliers like Norway, UAE and Botswana, who have shown that a different path is possible, so rather than just muddle through the crisis of another oil price crash then wait for another time to go through the same enervating cycle, Nigeria can and should make a conscious effort of throwing away the yoke of being eternally vulnerable to oil price slump.
The country in her bid to cushion the economic impact of the crisis has taken a $3.4 billion emergency facility from the International Monetary Fund (IMF) and is withdrawing $150m from the stabilisation fund of the Nigerian Sovereign Investment Authority (NSIA). Also, subsidy or under-recovery on petroleum products has been halted while the exchange rate is adjusted from N305/$1 to N360/$1 in addition to the government’s approval of N2.3 trillion Economic Sustainability Plan by the Vice President Yemi Osinbajo led committee.
Affirming that the NSIA is the only proper savings fund the country has aside the 0.5% Stabilisation Fund and the Excess Crude Account (ECA), which lack constitutional backing, the transparency regretted that it is one of the smallest sovereign wealth funds in the world, and the funds are mostly not adequately ring-fenced and also too tiny to adequately serve the intended purpose.
“All three accounts are currently operational. Today, these three accounts cumulatively have about $2.25 billion, which can only fund about 7.7 percent of the revised 2020 federal budget, as compared to Norway (a country of 5.3 million people) which has a sovereign wealth fund worth more than $1 trillion, and even more, the entire money is not available because it belongs to the three tiers of government and not just the Federal Government,” the brief remarked.
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