The Impact of Political and Economic Conditions in the Functioning of Nigeria’s Excess Crude Account

Abstract

Evidence from literature suggests that resource-rich countries tend to experience poor economic performance relative to economies that are not rich in natural resources. One reason for poor performance is that natural resource revenue s volatile due to price fluctuations. Another reason is that resource rents lead to poor economic management n countries without appropriate policy safeguards. Stabilisation funds are increasingly being used by resource-rich countries to mitigate the effects of volatility. As a major exporter of crude oil, Nigeria is one of the countries that has established, and still operates a stabilisation fund. However empirical evidence has also shown that the existence of a revenue stabilisation fund does not in itself guarantee good economic performance, and that underlying political and economic factors influence the establishment and operation of stabilisation funds. This paper identified the political and economic factors that have influenced the functioning of Nigeria’s Excess Crude Account. Drawing from relevant literature the paper explain the ways in which (1) the structure of the Nigerian federation and (2) the patterns of political interactions between the federating units on the one hand and major political actors on the other have affected the operation of the country’s stabilisation fund. The study also analysed the ways that non-political (i.e. economic) factors have affected the operation of the fund. The paper found that the greatest challenge to effective functioning of Nigeria’s Excess Crude Account has been Nigeria’s federal system where the constitution not only prescribes fiscal federalism, but also specify how all revenue accruing to the federation should be disbursed. Thus the fund currently operates somewhat ‘illegally’ and at the mercy of diverse stakeholders, who have shown little incentive to formalise the rules and ensure fiscal discipline.  The study therefore proves that stabilisation funds cannot in themselves change political institutional conditions which exist independent of the funds. The paper proposes the establishment of formal rules backed by legislation through a constitutional amendment, with clear provisions that would bind political stakeholders. The paper also recommends that Nigeria should take advantage of its improving non-oil GDP situation to delink government spending from oil revenue in the long run.

Keywords: Stabilisation fund; national revenue fund; sovereign wealth fund; Excess Crude Account; revenue volatility; natural resource revenue; budget-smoothening; procyclical policy; fiscal federalism.