Nigeria’s oil-rich delusion

It was clear in 2021, a year into the COVID19 Pandemic that the entire world is worse off because of the global pandemic. Even the most developed economies of the world have had major economic shocks and disruptions triggered by the world’s reactions to COVID-19 that forced many countries to slide into recession. The aviation […]

It was clear in 2021, a year into the COVID19 Pandemic that the entire world is worse off because of the global pandemic. Even the most developed economies of the world have had major economic shocks and disruptions triggered by the world’s reactions to COVID-19 that forced many countries to slide into recession. The aviation industry, hospitality, global supply chain, manufacturing and more sectors were severely hit. Meanwhile, technology and pharmaceuticals are among only a few sectors that enjoyed astronomical growth as a direct result of our reactions to the COVID19 pandemic.   

In the early days of the COVID19 pandemic, I remember having a lengthy conversation with Dr.  Mohammed Lawal, an Executive Director at the Kaduna State Internally Generated Revenue Service (KADIRS) about how COVID19 could change the world, the conspiracy theories, the potential winners and losers (regions, countries and or sectors) and how quickly the world could begin to recover. One of the things we both agreed on was that in the end, the pandemic will accelerate the adoption of new technologies (5G, e-commerce, robotics, IoT, cryptocurrencies etc.) on a global scale across sectors.   He rightly predicted that these changes may not be reversible, because even before COVID19, the world was expecting accelerated new technology adoption in the areas of FinTech, RegTech, HealthTech, InsureTech, EduTech mainly driven by Blockchain and 5G technology by 2020.  

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Dr. Lawal and his colleagues at KADIRS are well aware of this and have demonstrated remarkable resolve with perhaps the fastest and most efficient drive towards automation in the country. From vehicle registrations to personal income tax returns, Kaduna pushed and successfully automated so many government services. So even with a well enforced lockdown, Kaduna State was ranked fifth in revenue generation in Nigeria, first in northern Nigeria above Kano and nationally only below IGR giants like Lagos, Abuja and Rivers in 2021. This was to only get better as normalcy returned. 

In our conversations, we analysed possibilities of food security challenges especially in developing countries. Among the things we didn’t predict or we did not pay keen attention to in our conversation at that time was the counter-balancing effects of rapid technology adoption on energy consumption and by extension it’s potential negative impact on demand for Nigeria’s crude oil.   That, if the global aviation fleet was grounded, supply chain disrupted and the ships weren’t sailing, it will be only a matter of time before Nigeria feels the economic and other effects. Perhaps we didn’t see it coming because it was inconceivable that the world could go into a Wuhan style lockdown for many months. But it happened!  

Within a few months of the lockdown, loaded ships and stockpile of unsold crude oil were mounting in our harbors because nobody was buying. Suddenly, not just Nigeria, but the world was running out of storage facilities for oil. Shut down decisions don’t come easy in the oil sector and oil prices continued to tumble down the hill until we woke up one morning and the prices had gone negative in the US Market.  If that had happened on the OPEC side of things and persisted for so long, Nigeria’s economy would probably have been obliterated.  

This clearly illustrates that Nigeria is an oil exporting country and not an oil rich nor an oil producing economy and nothing has validated this claim like the events of the early days of the pandemic. Kaduna State gives me hope and people like Dr. Lawal and his colleagues at KADIRS epitomise the possibility and dire need for  Nigeria to take the lesson and begin its journey towards sustainable development without or with only a fraction of its revenues coming from oil.

Dr. Lawal, who is ironically a petroleum accountant goes on to explain to me his take on Nigeria’s dependence on oil and gas. He feels this dependence, in itself is not our problem. Our problems are mainly the near absence of fiscal discipline and lack of transparency in dealing with resource rents.  We are not an oil-rich or an oil-producing country. In fact, the reality is that, mismanaging our oil sector has significantly contributed to making us a poor country.  It is easy for the so-called resource rich countries to get infected with the Dutch Disease, where you have access to new resource that will enrich you but erode every other productive sector of your economy. Nigeria, like many other resources rich countries is a classic example of the resource curse. Our economic health simply dances along the trajectory of oil prices and output. 

It is true that abundant natural resource can become a ‘dead-end sector’ by crowding out the real sector of the economy, but it is still not the problem. Until a resource rich country’s macroeconomic management fail to achieve fiscal sustainability, resource is not a curse. Besides, dependence on the oil sector, is not a problem on its own anywhere else. It has never been, except where resource rents are mismanaged. It is not in Saudi Arabia, it is not in Norway and certainly not in the UAE.  

In fact, in the case of the UAE, at least 80 per cent of its budget financing comes from its equivalent of our Sovereign Wealth Fund. To look at the size of our Sovereign Wealth Fund and Excess Crude Account and claim to be oil rich is plainly hypocritical, or even even delusional.  

Nigeria has been oil dependent for far too long without making the requisite high quality investments that are required to insulate our economy from spot market oil price volatility and any negative changes in our daily barrels output that directly affect our rents. Therefore, the discussions that we should be having are not those of resource endowments but about fiscal sustainability and expenditure smoothing. There are very clear rules and guidance around these two that are enough to help us manage our economy better. 

This article first appeared on July 18, 2022.