In 2009, Margaret Atwood wrote a piece titled ‘The Future without Oil’ for a German Newspaper, Die Zeit. In that famous article, she said “it’s not climate change, it’s everything change”. That piece which is as relevant today as ever, presents us a picture of a possible future of an earth in which fossil fuel is no more; and thus prompts us to ask ourselves this pertinent question – what do we wish to create for ourselves today and for our future generations?
For years, Nigeria and some other African countries have depended on crude oil revenue for running their economies. While it is not a crime to benefit from natural resources such as oil, over-dependence on a mono-product for satisfying immediate needs without thinking of the future presents potentials of catastrophic consequences – as is evident today.
African countries, like other resource-rich jurisdictions have had a series of windfalls in oil revenue, yet with minimal impact on ordinary citizens, owing to the fiscal recklessness exhibited by governments during periods of oil boom.
In Nigeria, for instance, petroleum accounted for about 90 percent of foreign revenue over a long period, yet only contributed about 14 percent to national Gross Domestic Product (GDP). Over-reliance on crude oil as a major export revenue earner beclouded the development of some other productive sectors, which even contribute more to the GDP as shown in figure 1.
Figure 1: Sectoral Contribution to Nigerian GDP (2015)
Furthermore, the over-reliance on crude oil, whose price is prone to the vagaries of and volatility in the international oil market, exposes African nations to uncertainties in revenues, especially in periods of burst – as is the case today, leaving most of the economies with minimal revenues to fall back on.
While the current oil glut is biting export-dependent African nations hard, other crude oil rich countries who had strategic plans for the future – like Norway, Saudi Arabia, Qatar, etc., have less to worry about, because they all made provisions for the uncertain future. Such futuristic strategy is what differentiates them from their African counterparts, only some of which engaged in saving part of their resource revenues for the future generation, in what is called Sovereign Wealth Funds (SWF).
Today, as shown in figure 2, some of these stabilisation funds from oil revenues are running into billions of dollars, which would provide economic stability for those economies in the future, should oil run out or is replaced by another resource.
Figure 2: Sovereign Wealth Fund from Crude Oil.
Even though some African nations have made efforts at averting the potential uncertainties inherent in the commodities market (as a result of the boom-bust cycle) by establishing the Excess Crude Account (as is the case with Nigeria) or Sovereign Wealth Funds, it has only achieved mixed success in creating the framework for savings during high oil price regimes.
Where successes were recorded in savings, it helped to smoothen government finances and budgets, and attracted international agencies, such as the International Monetary Fund (IMF) to back fiscal reforms (as in Nigeria), yet it did not prove a good mechanism for ring-fencing savings, as it did not have a legal provision for the sharing of revenue amongst government tiers. This, in itself, was a major flaw in the savings programmes, as they were not directed toward the future, but for immediate sharing among the levels of government. As a consequence, there were large-scale thefts, funds misapplication, and mismanagement, as is the case of Nigeria.
The aftermath of the above failure in Nigeria was the initiation of the Sovereign Wealth Act in 2011, intended to invest oil earnings during windfall periods into infrastructure development, as well as providing funds (stabilisation funds) for the future generation. Figure 2 above shows Nigeria’s performance in the SWF as at 2015. Even with this, the fund has been beleaguered by issues of the lack of transparency and unaccountability in its management. This is not peculiar to Nigeria, as some other African countries (like Libya) have had their share of funds mismanagement. In spite of this absurdity, there should be a renewed effort on the part of the government at providing for a future without oil.
Strategies for Mobilising for the Future
• Economic Diversification
The oil sector creates only a handful of job (about 1 percent) in Nigeria, and the instability of revenue from oil could impact the overall growth of the economy (through changes in government spending), the position of fiscal and external reserves, and employment. Diversification here implies the development of the non-oil sectors (e.g. agriculture, manufacturing, services, etc.) and the reduction of oil dependency, as well as the creation of a non-oil economy that has the potential to sustain a high level of government revenue and the establishment of more jobs.
It is imperative for the governments of oil dependent economies to begin to diversify their economic base in order to reduce exposure to the inherent volatility and uncertainties that characterise the international crude oil market; improve private sector employment opportunities; drive up productivity; and strategically establish the non-oil sector of the economy, which in the future would act as a ‘safety net’ when revenue from oil may become insignificant.
To diversify the economy and thus reduce over-reliance on oil revenues, there is urgent need for national development plans geared towards boosting human capital development, rapid and consistent industrial expansion with the capacity to employ skilled labour, as well as mobilising the services sectors, which has the capacity to boost revenue for the countries.
To realise these goals would require a stable economic environment devoid of high inflationary trends, a business environment that is strengthened and liberalised such as would encourage trade and foreign direct investment, a deepened financial sector, as well as an expanded and fortified educational system. These will impact and support private sector-driven economic activities, especially in the non-oil sectors, thereby providing job today and for the future.
There is no doubt that complete diversification of the economy from the oil to non-oil sectors is a difficult task, however timely implementation of adequate policies will help in its achievement. Lessons of such policies and diversification efforts could be learnt from countries like Indonesia, Malaysia and Mexico, which have been able to implement diversification of their economies from oil, with huge successes recorded. These countries did not only create favourable business and economic environments, but also focused on quality upgrading, as well as encouraging their firms to develop export markets.
• Fiscal Responsibility
In the case of Nigeria, over the years government revenues or finances have been handled with a high level of fiscal irresponsibility by government officials, characterised by the misuse and mismanagement of revenues from crude oil exports, thereby jeopardising the infrastructural development goals of the nation. Today, the era of fiscal irresponsibility has to be jettisoned, and addressed as a misnomer of the past, in order to garner ample revenue for driving sustainable development initiatives for the future.
Furthermore, the government should, as a matter of importance, strengthen the agencies responsible for the management of the Sovereign Wealth Fund, to insulate it from political pressures and interests.
• Improvement in the Taxation System
The objective of a good tax system is to guarantee long-term fiscal stability of government programmes and policies. Thus, an appropriate tax administration is necessary to ensure that tax payers comply with the provisions of tax laws and that the funds derived therefrom are paid into the government coffers. Over the years, however, tax systems in developing countries have had mixed results.
It has been estimated by the Global Financial Integrity that outflows from developing countries due to tax avoidance/evasion and illicit financial flows amounts to about $1 trillion each year. This is especially rife in countries with weak tax collection institutions/systems. Therefore, countries should develop strategies for tightening every loophole to ensure appropriate tax collection, since such revenue could boost government finances needed for funding developmental projects.
• Boost Small and Medium Scale Enterprises (SMEs)
New firms and innovative SMEs play an increasing role as drivers of growth and job creation in most economies. A number of countries have witnessed, and are still witnessing successful SME-led economic growth and development. For instance, over 95 percent of industrial units are within the small-scale sector, with a 40 percent value addition in the manufacturing sector in India.
Enterprises of this type provide the second highest employment levels behind agriculture and account for 40 percent of industrial production. Thus, developing countries can learn a lesson from the foregoing example, and thus create and stimulate an environment which incentivises the growth of SMEs. This is a sure way of increasing GDP increase, while mobilising technical skills that will drive the future towards an environment devoid of oil revenues.
• Sustainable Development Policies
Sustainable development has the capacity to fundamentally strengthen adaptive capacities and safeguard national economies’ long-term prospects in the face of dwindling revenues from natural resources. Thus, going forward, national policies should be geared towards increasing the socio-economic wellbeing of its citizens (in both the short-term and long-term) through maximisation of the present inflows of income without diminishing the total stock of national assets.
Concluding Remarks
To achieve the goals of sustainable development – which means meeting the needs of today without compromising the potential for meeting those of the future – we must, as a matter of urgency, consolidate our fiscal system and stabilise the macroeconomic environment through rapid and sustained efforts at diversifying our economy. We need, also, to broaden the our export market potentials through a diversified export mix, and above all develop strategies for resource mobilisation that will entrench capital formation requisite for meeting the needs of the future.
To guarantee a sustainable future without oil, therefore, countries should begin to adopt a Savings Policy in the interest of the present and future. Such savings would act as real stabilisation funds or buffers at such times when oil revenue may become insignificant. Such savings should be set aside for investment in low-risk bonds so as to earn greater returns for the government, and thus provide for the future.
It’s also imperative to save today, so as to protect the economy from volatility in the international oil market, thereby providing sustainable capital growth that will serve as the ‘safety net’ for the present and the future.
Some other important safeguards against crude oil price volatility are as follows: utilising crude oil and natural gas as feedstock, i.e. expanding the scope of the downstream petroleum sector; forging a strong linkage of the upstream and downstream sectors of the oil industry; linking the petroleum sector with other productive sectors, e.g. agriculture, mining, manufacturing, etc; engaging in prudence in the management of costs of oil and gas operations; finding a balance between the removal of fuel subsidies and providing ‘safety nets’ for the citizens; curtailing government revenue mismanagement, misappropriation and misapplication; and investing massively in infrastructural development to create government expenditure multiplier effects in the economy.
Conscious effort needs to be made today to liberate countries from the shackles of the ‘Dutch Disease’ tendencies which have bedeviled most oil-producing nations for decades. The key to this is mobilising today for a future without oil. It was not raining when Noah built his famous Ark!
Chijioke Nwaozuzu, a downstream petroleum economics and policy expert, and Deputy Director at the Emerald Energy Institute can be reached on cnwaozuzu@gmail.com.
