Nigeria: Before the oil runs dry (3)

When this nominal increase is weighed against the increase in population from c. 74.5 million in 1980 to c. 166 million in 2013, the result is a 53.2 percent improvement in real income.

However, when oil prices are adjusted for relative value of $1 in 1980 compared to 2013 value, Nigeria’s oil in 1980 was sold at $104.12/barrel in 2013 dollar terms whilst income would be $214.39 million per day. Therefore, the country earned more from oil on a per capita basis in 1980 i.e. $214.39 million per day and $3.13 per capita, than it earns today – 2013: $252.25 million per day and $1.45 per capita.

While oil production levels have remained fairly stable over the last 34 years (fig. 15), other factors such as population, size of the public sector and leakage in the system have increased significantly.

We went further in our analysis to estimate what Nigeria would need to earn from crude oil sales in the years ahead for revenues and oil proceeds per capita to match the levels achieved in 1980 against the backdrop of a young and growing population, increasing public sector spending profile and weak or non-existent investments in infrastructure.

Our estimates indicate that oil proceeds per capita in 1980 is 2.2x that of 2013. Therefore, the country’s crude would have to sell at $239.0/barrel – assuming production levels remain constant – to generate oil proceeds of c. $554 million/day and oil proceeds per capita of $3.13. The possibility of this occurrence is remote.

Overall, our theory posits that incentives are necessary to grow Nigeria’s overall income.

For this state, dependence on statutory allocation for its fiscal operations results in a N1.5 billion deficit. This is because its recurrent expenditure consumes c. 80 percent of total receipts while capital expenditure – required for infrastructural development and growth – is 27 percent of total receipts. Consequently, the state’s deficit will be financed by borrowings, which places further constraints on development as a growing debt profile indicates a gradual increase in debt servicing payments; the opportunity cost being investments in infrastructure.

For this state, we further assume that it has a young population with median age of c. 19 years whilst c. 44 percent of the population is between 0 – 14 years of age. Therefore, beyond the debt that will be inherited by the significant portion of the current population, infrastructural decay and the attendant social problems will most likely result from this funding model.

In our theory, the calculated shift in the funding structure with an emphasis on increasing IGR would result in a robust income profile and surplus. As seen in figure 17, IGR contributes 71 percent to total receipts while contribution from the federal purse is 29 percent. Consequently, the state’s recurrent and capital expenditure is c. 51 and 17 percent of total receipts, respectively.

By and large, a viable and sustainable funding model that generates a surplus increases a state’s attractiveness to investors and enhances its ability to fund infrastructural development via the debt market without exerting pressure on its finances.

If FAAC becomes a domestic infrastructure/development fund available to exclusively fund projects in each state with the goal of making such state independent financially, then the additional income that such state generates makes the whole nation better off.

Essentially, Nigeria will still earn its oil revenues but can then boast of significant additional revenues due to the channelling of existing oil revenues into revenue generating projects. Consequently, overall wealth to the nation can be significantly improved by c. 3.6x i.e. N720 billion/N198 billion (fig. 18). In view of historical precedents, this is arguably the way forward for the country.

Conclusion

If the above holds, perhaps Nigeria’s economic and political administrators should strongly consider evolving the current system into one that stimulates healthy competition, provides incentive compatibility to states to create their own revenues and increase the overall wealth of the nation. As at 2010, 23 of Nigeria’s 36 states were running fiscal deficits. Lagos is the only state that generates IGR exceeding statutory allocation i.e. IGR to statutory allocation ratio of 3.4x (6yr average). This state’s IGR to statutory allocation ratio was 1.5x in 2004 and had increased to 3.3x in 2013 as a result of policies targeted at growing IGR.

While we acknowledge that all states may not perform like Lagos state, we are inclined to enquire as to what incentive does a state, say Niger state, have to enable it attract a blue chip multinational, Nestle for instance, to set up a best-in-class production facility in Minna, the state capital. The multiplier effect of such a development on employment and other economic activities will subsequently result in an improvement in the state’s revenue profile

The foregoing indicates a critical need to move Nigeria towards sustainable economic development. Unfortunately, we believe this may never be achieved with Nigeria’s current revenue sharing mechanism due to the low incentive it creates for states to want to seek other revenue generating options to improve their respective IGRs. The country therefore needs to develop a structure that incentivises and supports states to generate revenues. This is critical to the development of infrastructure in Nigeria, before the oil runs dry.

Sonnie Ayere and Tola Odukoya work for Dunn Loren Merrifield, a full-service investment house headquartered in Lagos

Sonnie Ayere  & Tola Odukoya