Nigeria Close to Another Recession As the Excess Crude Account is Depleted to $70m

Nigeria Close to Another Recession As the Excess Crude Account is Depleted to $70m

When President Obasanjo created the Excess Crude Account (ECA) in 2004, it was in a bid to save for the rainy days from the excesses of oil revenue. The idea was to remit excess of the budgeted benchmark into the account. By January 2009, the ECA was boasting of $20 billion and counting. There was hope that the status quo would be maintained, and in due time, Nigeria will have enough for many of its infrastructural projects.

It did not take long before the hope started getting pinched from stakeholders of the ECA, mainly, states and local governments. There was an incessant request for fund from the account in the name of many projects across the states and local government areas by governors. In 2012, the account was depleted of N2.07 trillion, a remarkable outflow that kicked off the push for even more.

Henceforth, the three tiers of government were struck with incessant needs for fund and there was no other source than the Excess Crude Account. The sum of N483 billion was used from the withdrawn N2.07 trillion by the federal government for fuel subsidy and N190.58 billion was transferred to a special intervention fund.

In 2013 fiscal year, N1.99 trillion was again withdrawn by the federal government. There were revenue shortfalls that needed to be augmented and about N1.08 trillion was used to fill the gap while N505 billion was used for subsidy payment and special intervention fund gulped N405.63 billion.

There was a surge in oil revenue during this period and the moral expectation was for an increase in the excess crude revenue too. But the withdrawal kept happening despite the increase in oil prices.

In 2014, the account was further depleted by N927.33 billion. Out of the amount, N400.23 billion was used to service fuel subsidy, N303.56 billion was doled out for revenue augmentation and N223.54 billion was sent to special intervention fund.

By 2015, the oil revenue was already dwindling and falling short of the budget benchmark, creating even a better alibi for the government to increase their visitation to the ECA. During this period, the government took N458.14 billion off the account. And once again, fuel subsidy took the lion share of the withdrawn sum – N359.39 billion, and the augmentation of revenue to the three tiers of government took N98.19 billion.

The government’s yearly visit to the account did not end in 2015. For the 2016 fiscal period, the government went again to withdraw the sum of N85.17 billion for the augmentation of revenue for the three tiers of government. Each year since 2012 had come with one responsibility or the other that requires the generosity of the Excess Crude Account.

In 2017, the sum of N76.25 billion was transferred to the Nigerian Investment Authority which was instituted to manage the Sovereign Wealth Fund where the surplus from oil revenue is invested on behalf of the government. Unfortunately, the establishment has been underfunded due to the use of excess crude funds for other issues by the three tiers of government.

2018 was another year of urgent national needs. The ECA suffered a huge withdrawal of $2.87 billion that was meant for so many governmental expenditures. $1.76 billion was used for the Paris Club refund to state governments. During the fiscal period, the sum of $496.37 million was also approved by President Muhammadu Buhari for the purchase of Super Tucano fighters from the United States.

Apart from these major expenses, two other significant transactions happened from the proceeds of the $2.87 billion. Presidential approval was given for the use of $380.51 million for the procurement of critical equipment for the Nigerian Army, Navy and Defence Intelligence Agency.

There was also approval for the use of $233.29 million for states matching grant to the Universal Basic Education Commission.

Though there were inflows from excess crude proceeds into the ECA during these times. A total of N2, 427.02 trillion went into the account during these six years. But it was notably deficient enough to expose the emaciation of the account. In August 2019, the balance of the Excess Crude Account stood for $274 million, and it was obvious the coming year would yield further depletion considering the downturn in oil prices and the lax revenue generation from other sources. Though there was a little increase of about $51 million between August 2019 and January 2020, it was preemptive to sustainability.

So it was not surprising when the Federation Account Allocation Committee (FAAC) announced on Wednesday that the strategic reserve account has been reduced to $71.814 million from $324.968 million recorded in January.

The Central Bank of Nigeria (CBN) has warned the fiscal authorities to build up buffers against revenue shocks by depositing more and withdrawing less from the rainy days account. But it is clear the government can’t keep its hands away from the reserved purse due to the current revenue challenges.

The federal and some state governments have been on borrowing spree for some time now, and they keep seeking for more funds, an indication that the non-oil revenue does not measure up to the expenditures. The Director General of Lagos Chamber of Commerce and Industry (LCCI) Dr. Muda Yusuf said it’s all evidence that the government of all levels in the country is broken.

“There is a strong temptation to draw down on the savings, which the excess crude account represents. One key factor is the weak oil prices.

“This naturally affects the fiscal stability of the various tiers and levels of government. These shocks would remain as long as we remain critically dependent on crude oil both for revenue and foreign exchange earnings.”

Apparently, the decline in oil prices pushed the government’s onslaught on the savings that was supposed to save the country in rainy days. The implication is likely going to instigate another recession and consequently, the devaluation of naira. The World Bank has warned that the depletion of the Excess Crude Account could easily plunge the economy into shock.

The former Executive Director of Keystone Bank, Richard Obire said that the depletion of the ECA and government’s desperate borrowing is a bad sign.

“We are still holding the exchange rate through the CBN’s weekly dollar interventions in the foreign exchange market. Today, with the level of buffer available to the economy, naira devaluation will be staring at us in the face.

“Remember we are not selling petrol at market prices due to subsidies enjoyed by the product and that has also put pressure on the fiscal side of the economy,” he said.

Experts believe that Nigeria’s economy is currently sitting on a keg of gunpowder, and if nothing is done quickly to diversify the economy and remove focus from oil, recession is going to hit Nigeria once again with unimaginable rate.

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