Given that
the oil price-based fiscal rule put in place in 2004 helped the country to save
$22 billion during the administration of President Olusegun Obasanjo, Nigeria
should have continued with the culture. Those savings became very handy in
cushioning the impact of the 2008/2009 global financial crisis on Nigeria’s
economy, when fiscal stimulus of five per cent of gross Domestic Product was
financed from the savings.
Now the lean
days are here and there is no reserve to deploy to save the day. Three pertinent
issues have now emerged. First, the relative huge windfalls from oil revenue in
the past five years were not in doubt. As oil prices averaged above $100 per
barrel in those periods, Nigeria’s total crude oil sales was estimated at about
$470 billion, not too far from the amount of $489 billion in the previous 15
years combined. That is, the total crude oil sales of close to half a trillion
dollars in nominal terms or unadjusted numbers under the Jonathan
administration were only five per cent below that of the Umaru Yar’Adua,
Olusegun Obasanjo, Abdusalami Abubakar and Sani Abacha administrations
combined.
Second, the
Excess Crude Account was devised as a mechanism to help government save oil
revenues above approved budget benchmarks in period of oil boom. This fiscal
savings instrument was backed up by the political will to actually save more
than $20 billion with another foreign exchange reserves doubling this amount
under the second term of President Obasanjo, when oil prices on average were
below $60 per barrel.
Unfortunately,
the Excess Crude Account was rapidly depleted by the immediate past
administration as governments at the three levels squandered the oil revenue on
bogus projects. The government at the state level especially contributed to the
near evaporation of the Excess Crude Account even as they were also spending
their monthly revenue allocation from FAAC with reckless abandon.
However, a
pertinent question that is often asked is: while the states were profligate,
what did the Federal Government do with its own share of the Excess Crude
Account funds? Suffice to say that by failing to save, the economy was primed
for sink. Also, the savings deficits have contributed to the present economic
situation of low investment, low economic growth, high inflation, unemployment
and misery index. It has also imposed fiscal constraints on the present
government with debt servicing now a third of total revenue.
The country
is facing a twin-deficit of six per cent of GDP, with fiscal deficits and
current account deficits of three per cent of GDP each. These deficits,
combined with declining capital inflows, have put pressure on the foreign
reserve and the exchange rate of the Naira.
Furthermore,
persistent high current account deficits signaling an over-reliance on external
savings tend to result in external debt crisis and pose setbacks to economic
growth. Although Nigeria’s external debts remain relatively low, the country’s
past experience and expenses of other African countries suggest that
over-reliance on external savings via high current deficits to finance growth
tend to end badly.
More
broadly, Nigeria’s low domestic savings and investment rates of 14 per cent and
17 per cent respectively, have substantially undermined the country’s
socio-economic development. China has savings and investment rates of some 40
per cent of GDP. In other successful Asian developing countries, investment and
savings rates have typically been close to a third of GDP.
As a result,
Nigeria’s economic base, namely, infrastructure, human capital, knowledge and
technology, has been overly degraded. Low public savings and poor public
infrastructure base have combined with corruption, capital flight, poor
investment climate, and security of property rights, as well as, macroeconomic
uncertainty to undermine private domestic savings and investment in tangible
and intangible assets.
There are,
however, ways to successfully institutionalize a savings culture. First, the
public sector should set the tone. Fiscal discipline remains paramount. There
are enabling laws and institutions to enhance a savings culture and enlarge the
public fiscal space. The rules and laws relating to the Fiscal Oil-Benchmark
Rule, Fiscal Responsibility Act, and the Sovereign Wealth Fund should be
strictly adhered to and implemented. The political will that serves the overall
interest of all Nigerians must be mustered; and if constitutional amendments to
effect the public savings culture are needed, then these should be initiated.
Savings and
investment from the private business sector and the household sector must also
be encouraged through effective financial intermediation process that goes
beyond the current casino banking and mere deploying of assets to government
treasury instruments. The growing pool of funds from Pension and Insurance
companies also need to be encouraged.
Successful
and sustained economic development requires high levels of domestic investment
which needs to be financed by domestic savings from the public, business and
household sectors. An important ingredient in ensuring high savings rate to
finance investment is institutionalising a culture of virtuous savings. Of
paramount importance is starting with fiscal discipline that avoids the episode
of saved oil revenue being rapidly depleted especially in the face of
unsustainable commodity boom. (Guardian)
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