Experts harped on the need for economic diversification through export of other products to swell foreign reserves that declined to $47.2 billion in June
Uche Usim, Abuja
When last week, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) rose from its 262nd meeting in Abuja with damning concern that the country was not committed to saving for rainy day, especially in the face of rising oil prices, those who knew what Nigerians suffered in 2016 did not find it funny.
The apex bank apparently saw that the government was treading on the same dangerous path to austerity as was the case between 2011 and 2014, when the global oil price skyrocketed to about
$140/barrel and yet the government did not save, until the crash of 2015/2016 ($28/barrel), plunged the country into its worst recession in quarter of a century.
The CBN Governor, Mr Godwin Emefiele who briefed the media after the MPC meeting said the committee observed that as the prices of crude oil increased in 2017 and 2018, the monthly allocation to various levels of government also increased, suggesting that Federal Government was not conscious of saving for the rainy day.
He added that the committee was concerned about the liquidity impact of the 2018 expansionary fiscal budget and increasing FAAC distributions due to rising prices of crude oil as well as the build up in election related activities.
In 2012, at the peak of Nigeria’s “oil boom era”, the 36 State Governors warned then President Goodluck Jonathan not to keep money meant for the states in Excess Crude Account (ECA) in the name of building fiscal buffers. They said all generated revenues must be shared to the last kobo since it was their constitutional right to enjoy a slice of government’s largesse monthly, via the Federation Account Allocation Committee (FAAC).
When the former President insisted it was good to save for the any eventuality, the Governors went court and secured judgement that compelled the Federal Government to share an estimated $10 billion in the ECA then.
But since then, the country, having battled recession, has not been able to save so much money in the ECA, despite the current administration’s attempt to be frugal in spending.
According to the Finance Ministry, current balance in the ECA, as at July 16, 2018, was a paltry $1,918,509,918.86, that of the Stabilization Account was N18,892,864,216.65 and balance in the Natural Resources Development Fund (NRDF) stands at N133,715,427,387.37.
More worrisome is the fact that the nation’s foreign reserves declined from $47.7 billion in May to $47.2 billion in June.
Experts say the aforesaid figures clearly shows that the country does not have sufficient fiscal buffers to withstand a sudden crash in oil price being a mono product economy, with weak determination to save and parades a huge population of about 200 million people.
They also expressed concerns that most states have been unable to generate their own revenue but have built their survival strategies solely on monthly FAAC allocation.
They said the ugly development is responsible for states not wanting to save in the ECA since they can barely stay afloat with monthly FAAC allocation.
That also explains why the states easily become restive and confrontational whenever they detect any shortfall in what they projected to share, as has been witnessed in the last three months in a series of squabbles between them and the Nigerian National Petroleum Corporation (NNPC).
According to the Nigerian Extractive Industry Transparency Initiative (NEITI) latest report, FAAC disbursed N1.938 trillion in the first quarter of 2018 to the Federal, States, Local Government Areas and other beneficiaries.
The amount shared represented an increase of 37.3 per cent when compared with N1.411 trillion shared during the same period in 2017 and 71.1 per cent of the N1.132 trillion shared in the same quarter of 2016.
They, however, expressed concerns about the relationship between the projected revenues of states and their proposed budgets. “The budget of all states completely outstrips their projected total revenues,” the report stated. For instance, the publication observed that the gap between projected total revenues and budgets is small in some states like Kano, Enugu, Delta and Bayelsa. In these states, projected revenue is at least 60 percent of the budgets.
However, in about 18 states, projected revenue is less than 40 percent of budgets. Examples are in the 2018 budgets of Adamawa, Akwa Ibom, Anambra, Bauchi, Benue, Borno, Cross River and Ebonyi states. Other states are Imo, Katsina, Kebbi, Kwara, Ogun, Osun, Oyo, Plateau, Sokoto and Zamfara). In particular, the NEITI report
described the situation in Cross River State as chronic as its projected total revenue only constitutes 4 percent of the proposed budget.
The NEITI report cautioned that: “These conditions will ultimately result in a situation where the states will either not be able to execute their budgets or have to increase borrowing”.
The report, however, projected brighter prospects for higher revenue disbursements for the rest of the year because of the rising oil prices, which currently hovers around $70 per barrel, in addition to the increased production target.
With the robust projections, the former Managing Director of Unity Bank Plc, Rislanudeen Muhammad, urged the government to save handsomely for the rainy day.
He recalled the economic crisis the country was plunged into between 2014 and 2015 due to lack of economic shock absorbers when global price of crude oil crashed with a corresponding crash in production volume due to incessant vandalism on oil facilities by militants in the Niger Delta region.
He said the lack of fiscal buffers to cushion the crude price fall put tremendous pressure on the naira such that the black market rate for the US dollar skyrocketed beyond tolerable limits.
Muhammad said it remains disastrous for Nigeria with about 200 million people to remain a heavily import dependent mono-economy.
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He then advised that for the country to be insulated from the shock of sudden crash in crude oil prices or production volumes, the government must save handsomely from oil proceeds and also diversify the economy in concrete terms by walking the talk.
“The government must save. The prices of oil has been going up consistently since 2016 well above our budget benchmark but instead we’re ballooning our spending and not saving. We even got a waiver from OPEC to produce and sell within our capacity and we are doing 2.2m barrels a day. We have had pretty stable production with minimal disturbances from the militants in the Niger Delta. We must save.
“As we diversify the economy, we must also build robust fiscal buffers to cushion us from the pains of sudden crash of crude prices if it happens. That explains why the UAE, Saudi Arabia and other oil-rich nations did not feel the impact of the oil crash in 2014/15. They had fiscal buffers to withstand the tremors and again, they are diversifying rapidly since it is dangerous to rely solely on oil with its volatility.
“But from the way things are in Nigeria today, it is clear we have not learnt our lessons because FAAC allocation has increased. We have nothing in the Excess Crude Account (ECA). It’s less than $2 billion. Our foreign reserve has dropped. If not for strategic CBN intervention, the pressure on naira would have jerked up the black market dollar rate. The currency is artificially controlled.
“We have a National Assembly that has not helped matters by jerking up oil benchmark. Ordinarily, if we maintain the oil price mark, whatever excess we have is to go to ECA.
“We need to diversify. We need to religiously implement the ERGP”, Muhammad stated.
However, Odilim Enwegbara, a Development Economist and International Finance Specialist does not believe in the sermon of saving for the rainy day.
He said that philosophy was horribly misplaced because saving when there is gross insufficiency remains the most inappropriate thing to do.
Rather, he said government should spend widely but wisely to urgently close the nation’s infrastructural deficit gap estimated at around $350 billion.
“Government is not like an individual that would decide to save even when hungry. In modern economics, government must spend to grow the economy. You can’t save when you don’t have enough. Government needs to spend on capital projects. You can’t put idle funds in the coffers with low interest rate and go and borrow at higher interest rate when there are so many things we need to spend on to grow. The less the government spends, the wider the infrastructural deficit gap and the less attractive the country is to foreign investors.
“Government also needs to block leakages in the system to ensure Nigerians get value for money.
“I think the real question we should be asking is; is government spending wisely?
“Again, we must borrow for capital spending and not for recurrent expenditure. We really need to reduce our recurrent expenditure. We also need to borrow externally because it is cheaper than borrowing locally to address capital expenditure challenges”, Enwegbara advised.
Other experts also harped on the need for economic diversification through export of other products to swell the foreign reserves that declined from $47.7 billion in May to $47.2 billion in June.
Although the CBN Governor said the reduction had nothing to do with politics, all the same analysts called for multiple income streams for the country.
Emefiele said: “the decline has nothing to do with politics. What is happening is as a result of US Fed normalisation. Since the interest rate has gone up in the US, and other advanced economies, in an attempt to stimulate their economies, these money that moved into emerging economies have now been taken back and this means there will be so much outflow of cash than inflows and of course we have our own share of it.
“But it must be noted that Nigeria has performed better than other emerging market around the world, with a stabilised exchange rate has remained stable because we have been able to build enough buffer to support our currency and that is why the exchange rate has remained stable. Countries like South Africa and others have had their currencies depreciated but the naira remains stable at N360/$ at this time”, he said.