Yar’Adua Foundation: Nigeria Requires Savings, Stabilisation Mechanisms .Crude oil slips further below $80 per barrel

Stakeholders who gathered on Thursday in Lagos in a round table on “Savings and Stabilisation Mechanism for Nigeria,” organised by the Shehu Musa Yar’Adua Foundation’s Oil Revenue Tracking Initiative (ORTI) have concluded that Nigeria would require a saving and stabilisation mechanism to absorb crude oil price volatility.

This is coming as crude oil prices recorded their largest one-day drop in two weeks yesterday, with expectations building that OPEC could wind down an output deal that has been in place since the start of 2017 due to concerns about supplies from Venezuela and Iran.

In her presentation on “Policy options on safeguarding and smoothening fiscal adjustments in Nigeria at the Shehu Musa Yar’Adua Foundation’s roundtable,” a former Minister of Education, Dr. Obiageli Ezekwesili said the country lost the opportunity to save in the five cycles of oil boom witnessed between 1970’s and 2014 as a result of the mismanagement of the country’s resources.

According to her, the savings in the Excess Crude Account (ECA) set up by the administration of former President Olusegun Obasanjo were depleted by the successive administration.

Ezekwesili argued that the six years of record high oil prices after the tenure of Obasanjo, could have built up foreign reserves to as much as $100 billion including an ECA level of at least $40 billion.

“The summary of the inflows and outflows from the Account shows that the opening balance was $4.56 billion in 2011 and reached a peak the following year at $8.7 billion before declining to $2.3 billion in 2013. The balance as at May 2015 was $2.07 billion,” Ezekwesili said.

Citing a comment by a former Minister of Finance and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala at the 2014 World Economic Forum, Ezekwesili quoted the former finance minister as saying that “the depletion of the Excess Crude Account to about $2.5 billion has made the country morevulnerable than it was in the past and put the economy of the country at great risk”

Ezekwesili argued that about $200 billion was used to rebuild the entire Europe after the Second World War, while Nigeria has earned over $1 trillion from crude oil without commensurate development in human and infrastructure.

The former Vice President of World Bank disclosed that Botswana is the only country in sub-saharan Africa that has managed her mineral resources efficiently.

Also in their presentations,  a member of the Central Bank of Nigeria (CBN) Monetary Policy Committee, Prof. Adeola Adenikinju and Andrew Onyeanakwe, noted that the government spending and the country’s revenue have no link.

Adenikinju, in his presentation, identified incoherence data as a major challenge in the country’s efforts to save, adding that over $1 trillion earned from oil has not reflected in the people’s welfare.

He said ECA and Sovereign Wealth Fund were supposed to provide stabilization fund.

According to him, temporary shock is not supposed to the economy if the stabilization fund is working.

“But when oil price goes down, the Federal Allocation goes down. So, the stabilization mechanism is not working,” he added.

On his part, Onyeanakwe argued that Nigeria’s $1.5 billion savings in sovereign wealth fund is a far cry from Norway’s over $1 trillion, Saudi Arabia’s over $500 billion and Algeria’s $7.6 billion.

In another development, crude oil prices recorded their largest one-day drop in two weeks yesterday, with expectations building that OPEC could wind down an output deal that has been in place since the start of 2017 due to concerns about supplies from Venezuela and Iran.

Global benchmark Brent futures were down $1.02 at $78.78 per barrel, the largest one-day fall since May 8, while United States crude futures dropped $1.08 to $70.76 a barrel.

Reuters reported that OPEC may decide in June to lift output to make up for reduced supply from Iran and Venezuela and in response to concerns from Washington about a rally in oil prices, OPEC and oil industry sources told Reuters.

Russian Energy Minister Alexander Novak said production cuts could be eased "softly" if OPEC and non-OPEC countries see the oil market balancing in June, the Interfax news agency reported.

Venezuela's output has fallen amid an economic crisis, while Iran's supply is threatened by U.S. sanctions.

These factors have helped push Brent and WTI to multi-year highs, with Brent breaking through an $80 threshold last week for the first time since November 2014.

OPEC and some non-OPEC major oil producers, which are scheduled to meet in Vienna next month, previously agreed to curb their combined output by about 1.8 million barrels per day (bpd) to boost oil prices and clear a supply glut.