How Nigeria can survive the oil slump – NEITI
By Ifah Ele Sunday
The Nigeria Extractive Industries Transparency Initiative (NEITI) has come up with a prescription on how Nigeria can cope with the current economic challenges caused by COVID-19 pandemic.
NEITI is a government agency task with the challenge of ensuring accountability and transparency in the solid mineral and natural resources sector.
In its Policy Brief No. 06, issued on June 6, 2020, entitled: “Insulating Nigeria from Perennial Oil Price Volatility, NEITI gave four ways in which the country can stay afloat in spite of the devastating effects of Covid-19 pandemic.
NEITI observed that the drop in oil prices has exposed countries like Nigeria to unusual economic crises, therefore, the country would need to figure out ways to cope with oil price shocks.
The organisation in the Policy Brief argued that, rather than just muddle through the crisis of another oil price crash then wait for another time to go through the same cycle, Nigeria should make a conscious effort of throwing away the yoke of being eternally vulnerable to oil price slump.
Below are some of NEITI’s recommendations:
· Maintaining a savings fund.
NEITI said a healthy minerals savings fund is usually recommended for resource-rich countries for three reasons: “to smoothen revenue over the life of the natural resource; to keep a substantial part of the windfalls out of the budget as a form of insulation against the distortion of the Dutch Disease, and to prepare for the eventual depletion or loss the natural resource and keep part of the accrued benefits for the future generation.”
It argued further that for a time like this, Nigeria needs the kind of insurance cover that can come from a robust savings fund.
Nigeria urgently needs to diversify government revenue and exports
To address the challenges standing between Nigeria and a healthy savings fund that can insulate the country against perennial oil price volatility, NEITI recommends the following: “Amending Section 162 (1) of the 1999 Constitution to allow for part of oil earnings to be saved; Abolishing the Oil Price-based Fiscal Rule (OPFR) where revenue over oil price benchmark is saved then replace it with a mandatory saving of a percentage of daily oil production; Transferring the proceeds from the percentage of daily oil production to NSIA to invest mostly in easily convertible instruments, and finally increasing the NSIA’s stabilization fund from 20% to 40% and sharing dividends from NSIA’s earnings every year.”
· Reducing dependence on oil for revenue and export
NEITI says Nigeria would continue to face challenges as long as the government depends on a product given to price volatility for half of its revenues. In terms of exports, oil still accounts for more than 80% of Nigeria’s export earnings. It is important to further boost non-oil revenue and increase non-oil export. Two recommendations were given by NEITI, which include: “Increasing revenues from taxes and tariffs and boosting non-oil exports.”
The Policy Brief added that even as Nigeria urgently needs to diversify government revenue and exports, it is clear that it can still make much more from the oil and gas sector, in order to address the revenue needs of the country.
· Correcting falsehoods to Nigeria’s economic structure
Dependence on natural resources is known to create misrepresentations of the economic structure of countries like Nigeria.
Much more needs to be done to reduce dependence on imports, and ensure that that agricultural, manufacturing and services sectors can compete and meet both domestic and export needs.
NEITI recommended that “this can be achieved by ensuring macro-economic stability, further improving on the ease of doing business, investing more in physical and human infrastructure which should reduce the cost of doing business, and implementing a suite of incentives and reforms to attract foreign and local investors in areas where Nigeria should have a comparative advantage such as agriculture and agro-processing, petroleum refining, solid mineral extraction and beneficiation, light manufacturing, and services.”
· Blocking leakages and maximizing opportunities in the oil and gas sector.
NEITI said in the document that “Nigeria has more gas than oil, with the country usually described as a gas province with some oil. With a proven reserve of 200.7tcf as of 2018, Nigeria has the highest gas reserves in Africa and the ninth highest in the world.
This will help in increasing both government revenues and national productivity. To effectively block leakages and maximize opportunities, the following should be considered: eliminate theft of crude oil and refined products; embrace full deregulation of the downstream sector; boost gas production and utilization; and to ensure transparency in the oil and gas sector.”
NEITI, in its conclusion, said “due to the outbreak of COVID-19 pandemic, the present slump in oil prices has again reinforced the danger of overwhelming dependence on natural resources by countries like Nigeria. Managing the economic crisis should be a priority. But it is important to come to terms with the instability of oil prices and immediately embark on weaning Nigeria off its unhealthy dependence on oil for the bulk of its government revenues and foreign exchange.”