FEATURE ARTICLE

Chamberlain S. Peterside, Ph.DFriday, August 13, 2004
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New York, NY, USA

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CASH-AT-HAND:
WHAT SHOULD NIGERIA DO WITH ITS CRUDE OIL WINDFALL?


…Lessons From History.

ew months ago as the price of US benchmark light sweet crude hit $44 a barrel, I was discussing the need for equitable commodity pricing in the global market, especially nowadays, so no country - be it consumer or producer is harmed by unduly high prices or gets a raw deal through unfairly low prices.

Ironically, prices continued to skyrocket, closing above $46 a barrel at the New York Mercantile Exchange (NYMEX) in early August, and the highest level in 21 years - since NYMEX began its tracking. For a brief period it seemed as though prices will abate after polling result in Venezuela showed that President Hugo Chavez had survived yet another re-call attempt, but in mid August prices escalated and was a whisker away from $50 a barrel before receding.

The current price trend simply shows that anything is possible in today's global dispensation; no one has the crystal ball. Who could have expected that the dragon - China would soon rise and become such a global powerhouse, threatening to overtake Japan (and maybe the US some day) as the second largest economy in the world? Just tune in to Lou Dobbs on CNN and you would realize how critical the issue of outsourcing has become in US politics - third world India now threatens the technological dominance and livelihood of industrialized countries.

The current round of crude price hike was so sudden, yet it was precipitated by strong demands by two new industrial giants - China and India. Seems like growing energy consumption in these countries has not been sufficiently factored into international price equation. But again, this phenomenon has turned out to be a boon of sorts for OPEC and oil producing nations in Eastern Europe/ Central Asia - Russia, Kazakhstan and Azerbaijan.

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For some of the producer-nations, the sudden surge in revenue is creating new questions as to how well financial resources would be managed - Nigeria is one of them. According to the finance Minister Dr. Ngozi Okonjo-Iweala, over $2.5 billion has been saved so far. President Obasanjo has had the rare good fortune of ruling Nigeria twice and presiding over two oil booms in his lifetime. The first one, with little to show, whether this would be different remains to be seen.

…New Era, New Problems.

Naturally, there has been a drastic shifting of tide in the last 20 years. For a lot of the developing and advanced countries, some progress has been achieved over the last two decades, which is hardly the case for Nigeria (or Africa for that matter). Nigeria is still saddled with a maze of intractable problems, like a declining standard of living where 70 percent of the population still live below poverty line, HIV/AIDS pandemic - over 5 million people infected, decaying infrastructure/inefficient public sector, high unemployment - estimated at over 30% of working population and widespread civil unrest - over 10,000 already killed since 1999.

That said, few things are going well for Nigeria right now; it has successfully transitioned to civilian rule, currently in its fifth year, though still hanging on a spring balance. Secondly, high oil price is back with a bang.

Recent statistic show that in June 2004 alone, the country raked in nearly $3 billion from crude export, foreign reserves have risen by 13% in the last few months to over $11 billion. According to official figures, by May 2004 the country had already met its annual revenue target for this fiscal year. Rumors have it that plans are afoot to draw up a national budget stretching till the year 2007. If that happens, it would be the first time in history and thanks in part to the fiscal discipline of the current finance Minister, Mrs. Okonjo-Iweala.

On the other hand, pressure is mounting within the country for the finance ministry to distribute the spoils to the 36 states and more than 700 local governments. Proponents, argue that after all the constitution stipulates that accrued revenue must be distributed amongst the constituent parts of the federation. Technically, that argument seem logical, but judging from empirical evidence, it is very possible that, much of the excess revenue if distributed to the states and local governments would be squandered and even end up in foreign bank accounts.

…Borrow A Leaf.

The experience of some energy-dependent or industrializing developing countries comes very handy in seeking ideas of how to handle this windfall. India with a massive foreign reserve of over $80 billion earned from technology outsourcing has been gradually retiring its loans to multilateral institutions and transitioning from a debtor to creditor nation.

Thanks to the sustained high oil prices, over the last few years, Russia has been building up an impressive cache of foreign reserves that allows it to repay its debt, revamp its ailing economy and tackle some of the market reform and social problems faced since the 1990s.

Aside from being the fifth largest exporter of crude in the world, Venezuela virtually sits on top 12% of US gasoline consumption, through its controlling stake in the filling station chain called CITGO. In Norway and some gulf countries, a portion of oil revenue is supposedly preserved in special accounts for future generations. Nigeria, with its teeming population might not afford such luxury.

…What Steps?

There are enough domestic quandary to keep the government in Nigeria busy, and sufficient problems and hungry mouths that could easily gulp any amount of excess revenue earned, yet this is not the time to share the excess revenue, its an opportune time to be sensible in laying stronger economic foundation for the future, the time to strive toward diversifying the country's revenue-base to cushion it from incessant price fluctuation in future. Some things worth considering are:

  1. Never fall for the economically flawed and shallow-minded argument about the constitutionality of sharing excess revenue. The federal government must stick to current revenue allocation formula as the Finance Minister has rightly maintained. Monitor the budget implementation process at the state/local government levels and parastatals very closely. Good-performing entities deserve additional incentives but the laggards must get their house in order or show cause why they deserve more money. Even at that, distribute not more than 10 percent of the additional proceeds.

  2. Preserve 50 percent of the excess revenue for the rainy day, which should act as a reserve fund for ameliorating future budgetary shortfall caused by unstable crude oil price or unforeseen circumstances.

  3. Utilize 20 percent of the funds to revamp and accelerate the completion of existing key industrial projects like the Steel Mills, Aluminum Smelting Plant, Liquefied Natural Gas Plant, Power Plants, Petrochemical Plant and Petroleum Refineries, get them running and phase in a divestiture program to spin the enterprise off to the investing public/strategic investors.

  4. Do not indulge in planning or erecting new white elephant structures unlike the 1970s. Current leaders must learn from the mistakes of their predecessors by not engaging in frivolous spending pattern. There are already subtle signs of such thoughtlessness, what for the recent $30 million loan to Ghana and Sao Tome Principe, (unless proven that the money is for concrete mutually beneficial projects). Legend has it that General Gowon helped pay striking teachers' salaries during his visit to the Caribbean in the 1970s.

  5. Stop clamoring for debt forgiveness, get a better handle on the country's external debt stock and focus on how to minimize borrowing and amortize existing debt. Revisit the debt buy-back and debt for equity swap programs that could be leveraged to minimize debt-service payments to the Paris and London clubs.

…Broader Horizons.

In an emerging global community, Nigeria must look beyond its immediate borders for investment opportunities. The focal point of such investment philosophy is to target and acquire industrial assets overseas that could compliment domestic economic interests and serve as sources of diversified revenue stream. The acquisitions should never be at the detriment of domestic priorities, nor should it be an attempt to ignore pressing problems at home. Realistically, a well-articulated external investment policy can only help provide regional and international leverage and long-term financial benefits to the country. A recent report by the United Nations Conference on Trade and Development (UNCTAD) points to a growing trend of foreign direct investment of developing nations in advanced countries, something unheard-off less than 10 years ago.

The policy to acquire real assets overseas by the Nigerian government is not new. During the 1980s and 1990s there was widespread debate as to the efficacy of such measures. Some action was taken; hence real estate properties were acquired by government parastatals like Nigerian Ports Authority (NPA), Nigerian Airways, Nigerian National Petroleum Corporation (NNPC). A high-profile edifice dubbed the "Nigerian House" was erected during the mid 1990s in a prime location of New York City, two short blocks from the United Nations Plaza.

Experience shows that during the reign of General Abacha, petroleum refineries were also acquired in Sierra Leone and Brazil but then converted to personal property of the late dictator. Such self-centered and corrupt approach is not the model we are advocating.

Conditions today point to the fact that there might be window of opportunity to execute a more realistic strategy. Ownership stakes in key industrial assets abroad can only help meet potential demand for the domestic economy and serve as a source of revenue. As Nigeria today earns substantial income from crude export, a high gasoline import bill continues to deplete those earnings, even with the massive importation, there is still acute shortage of refined products due to insufficient local capacity. If Nigeria were able to successfully acquire petroleum refineries abroad when it needed to, the country wouldn't have to now spend so much on importation.

In an era when the government is aggressively divesting from public enterprises at home or feeling the crunch of capital flight, one might question the desirability of such a policy. The strategy calls for utilizing at least 20 percent of the current $11 billion foreign reserves, which is already domiciled abroad anyway. To achieve this objective Nigeria needs to engage highly qualified funds managers or investment advisors, who must be given free hands to deliver reasonable risk-adjusted returns by investing in tangible value-added industrial assets in advanced countries.

Terms of reference should be clear-cut just as performance metrics must be determined for the investment institutions. If necessary, there should be an oversight by such government agencies like the Bureau For Public Enterprise (BPE), external division of the Central Bank or any other specialized agencies. An average of 20-30 percent return on investment (ROI) could mean additional $500 million or more flowing into the nations coffers, without factoring in the potential capital appreciation or other economic benefits.

It is early to predict how long this current price hike would subsist or when next the world market could experience such a trend. The windfall is nothing short of a Godsend, coming at a time when Nigeria needs it most. It stands to be seen how judiciously this administration would manage the windfall, hopefully not so frivolously like erstwhile regimes.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.