Saving for development
When Nigeria’s immediate past Minister of Finance, Dr. Ngozi Okonjo-Iweala said the other day that a lack of political will to save oil revenue under the Goodluck Jonathan administration was responsible for the challenges facing the country currently, she was right.
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 institutionalise 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.