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special issue: federations and the economic crisis
Declining oil revenues drag Nigeria into recession
REUTERS/Akintunde Akinleye
A money dealer counts Nigerian currency, called the naira, in his office in Lagos. Nigeria’s central bank governor has moved to reassure investors that depreciation of the naira has protected Nigeria’s foreign reserves.
By dejo olotoye
When the economic crisis hit Nigeria, the nature of the impact was a world apart from what was happening in most European countries. In Europe, there are four G-20 countries not counting the European Union itself. In Africa, there is only one: South Africa. But there are mineral resources in Africa, almost all exported. In Europe, North America and Asia, there are mining companies and paying customers for these resources. After almost 50 years of independence, most African countries are still economically dependent on their former colonial overlords and other Western powers. Intra-African trade, or any other form of economic co-operation, is minimal.
Nigeria is a typical example of a country in this unenviable predicament. It does have a federal structure, with 36 states and a Federal Capital Territory. Each of the states has its own political administration with a governor at the helm. The country is, however, highly centralized in its mode of operation, especially in revenue collection. This is a direct consequence of 29 years of military rule during the 49 years since independence.
The effect of the crisis on Nigeria has been sudden and increasingly severe. For some time, the country had been enjoying a copious inflow of petro-dollars. The peculiarity of the Nigerian situation is that the inflow of oil money did not translate into buoyancy for the economy. Since the start of the crisis, the flow of petro-dollars has slowed to a trickle and, in fact, capital is flowing out of the country. This withdrawal of foreign investments from the capital market has contributed to the crash.
The Nigerian stock market rose to its peak in March 2008 with a total value of about US$81 billion (12 trillion naira). By May 2009, it was valued at less than US$34 billion (five trillion naira).
Delapidating infrastructure
Nigeria’s declining infrastructure has led to the collapse of many enterprises and consequent loss of jobs. Before the effects of the economic crisis hit Nigeria, there was massive youth unemployment – an incredible 80 per cent: the economy was absorbing less than 10 per cent of college and university graduates. Youth unemployment has been getting even worse because of the crisis.
REUTERS/Maxim Zannu/Handout
Youtng men play checkers in Lagos to while away their time. In Nigeria, unemployment in Nigeria is particularly high for youths and new graduates.
The global crisis started in 2008, but Nigeria has been grappling with a decline in its economy for about 20 years. In the meantime, the population has been growing by between two and three per cent annually, putting Nigeria in the top 40 fastest-growing of 192 countries. Unfortunately, the supply of basic necessities has not been increasing as fast as the population. The roads are bad. Potable water is not available to many. Electricity does not reach every house. There were only 1.7 hospital beds for every 1,000 people in Nigeria in 2006, compared to 2.9 in Canada.
Reliance on black gold
Nigeria struck oil in commercial quantities 50 years ago and has been one of the major producers of “black gold” for many years. The lack of a significant rise in Nigeria’s economy over the half century has been attributed to the lack of an educated work force, to corruption in the education system and to general mismanagement. The political and economic structure failed completely to adapt to this resource boom in a constructive way.
The reliance on crude oil has been near total for decades: about 90 per cent of export earnings come from oil. Other sources of income on which the country relied before it struck oil have since been neglected.
To provide the funds for state and federal governments, Nigeria has a pool of funds known as the “federation account.” It is into this account that proceeds from crude oil sales are deposited. Because the country is, in practice, more unitary than federal, the federal government has been able to claim about half of the oil money in this account. The other half is shared among the states and local governments, and allocated to special funds. The states, except one or two, depend almost entirely on allocations from the federation account to meet all their needs. They cannot even pay workers’ salaries for a single month without the allocation from the central purse.
Responses by the federal government to fix the problems in handling central revenues have been ad hoc. President Umaru Yar’adua recently proposed a cut in the remuneration of political office holders. The proposal was widely commended by the Nigerian public. But the pay cut will not revive or diversify the economy.
Making ends meet
To make ends meet, the government has been drawing on savings from better times. For many years the crude oil price was much higher than the amount on which the budget was based. During this time, the surplus was paid into what is known as the “excess crude account.” Since the beginning of 2009, the opposite has taken place. The price of oil in the world market has been lower than the budget benchmark. The federal government – which holds the purse strings – has been withdrawing from this account and sharing with the two other tiers of political administration, which has been a helpful policy.
Nigeria’s Minister of Finance, Mansur Mukhtar, said recently that the country might have to resort to external borrowing to fill the gap created by a 30 per cent shortfall in revenue. His rationale is that, since Nigeria’s debt is at a low level, there is room for further borrowing. The federal government deficit in the current year’s budget is huge. The question that arises is when will the government invest in infrastructure and human capital?
One major step that analysts have seen as a rather panicky reaction to the meltdown was the devaluation of the country’s currency, the naira, by the Central Bank of Nigeria. The objective of the devaluation was to reduce the rate of importation and prevent a rapid depletion of Nigeria’s external reserve. The naira fell within a few weeks from between 145 and 150 naira to the U.S. dollar to 117 and 120 naira, seriously worsening inflation in Nigeria.
Less money to share
The effect of the recession due to the falling price of oil is also being felt by the Nigerian states because less money for sharing has been flowing into the federation account. The impact varies from state to state, of course, because of the differences in their financial responsibilities. In education, for example, some states have more primary, secondary and tertiary schools to maintain. Ogun state, with a population of 3.7 million, has 473 high schools, two universities and one polytechnic. Kwara state, with a population of 2.3 million, has 325 high schools, one polytechnic, and is just about to establish a university.
The reliable revenues from crude oil rendered governments in Nigeria complacent. They had not been pursuing the collection of taxes and the generation of other forms of revenue. The meltdown, however, appears to have roused many of them. The amount of internal revenue that can be generated and the level of financial responsibility will determine the recession’s effect on each state.
Osun state, in southwest Nigeria, is trying to diversify its economy. The State Commissioner for Finance and Economic Development, Adetoyese Ojo, reported that the government had begunn a program of agricultural development. Emphasis will be put on cocoa production and seven agro-allied companies are to be set up before the end of this year, although the history of state-owned firms in Nigeria has not been illustrious. Mr. Ojo also revealed that the salaries of political office holders had been cut by 10 per cent, which will free up some funds for more productive uses.
In Kwara state in north-central Nigeria, the government has been concentrating its efforts on the generation of internal revenue. The State Commissioner for Finance and Economic Planning, Alhaji Abdulfatah Ahmed, said all leakages in the tax collection machinery were being blocked, which, if realized, will be a major accomplishment.
There have been no government bailouts to enterprises, nor any indication that such measures are even being contemplated. In fact, any form of bailout to Nigerian business would be ineffective. What works for the economic problems of the Western world cannot work in Nigeria – the causes are not the same. When the West was flourishing in prosperity, Nigeria was in poor shape.
Reforms needed
The reality is that Nigeria’s economy can only be energized by restoration of its collapsed infrastructure and a decisive end to chronic mismanagement. The central government says that it is taking steps in these directions, but the populace has yet to feel any effect of what the government says it is doing.
So far the saving grace has been the availability of the excess crude account from which money is regularly withdrawn to make up for shortfalls in budgetary provisions. The recession will manifest itself in its full intensity in Nigeria’s economy if the crude account is emptied and the oil market fall continues. Nigerians are used to what is generally known as the fire-brigade approach. As yet, there has been no coherent, coordinated attempt to solve the problem. 
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