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Revisiting IMF’s second Nigeria Policy Support Instrument
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Last week, the International Monetary Fund (IMF) released the third review of Nigeria’s Policy Support Instrument (PSI) with a call on government to institutionalise the gains of reforms.
Kirk Leigh
But it would seem that the call is no different from that of last year’s, urging that government continues with reforms having achieved robust growth, lower inflation, dramatic decline in debt and huge reserves.

In that last PSI, IMF recommended the country’s prudence with oil revenue.

The reason for this caution is by no means far fetched; Nigeria has a historically poor record regarding transparency in oil revenue management. In particular during the pre-1999 military dictatorships, billions of US dollars were lost to corrupt leaders. While the Obasanjo regime had sought to fight corruption, transparency in Nigeria’s oil sector remains very limited. The extent to which the Yar’Adua government would go remains to be seen.

IMF says to safeguard Nigeria’s oil wealth the country must come up with oil savings management guidelines and undertake thorough cost-benefit analysis for projects undertaken.

Also recommended for the country are improvements in public financial management and due process procedures. The country would also benefit from prudent international reserves management regulations. These, the Breton Wood institution assert, would help ensure the effective allocation of resources and combat waste.

But earlier, Nigeria and Sao Tome had agreed that transparency was to become the ground rule in the Joint Development Zone between both countries, which soon would become São Tomé’s first oil producing area. Reports say the zone is set to become a showcase in transparent oil revenue management.

Nigeria has had to sign up to the Extractive Industries Transparency Initiative (EITI) to ensure transparency. This is even as an audit of oil firms, on their level of compliance failed to indict them, but rather pinned the problem between the Central Bank of Nigeria and the NNPC.

Managing oil wealth has proven to be a difficult challenge for many countries across the world. Examples include Ecuador, Mexico, Venezuela, etc. In Nigeria, for example, oil revenues have led to huge investments in capital and infrastructure in the 1970s and 1980s, but productivity declined and per capita, and the GDP remained at about the same level as 1965. In other words, accumulated oil wealth over a 35 year period of some $350-billion did not raise the standard of living but worsened the distribution of income in Nigeria. Studies show that not only Dutch disease but more importantly waste of capital resources through bad investments and corruption have resulted in this predicament.

Following from the agreements with Sao Tome, it appears the fiscal imprudence is going to be a thing of the past. Menezes and Obasanjo signed a declaration - dubbed the Abuja Joint Declaration - outlining the management of the joint zone. The declaration says the zone is to be managed in accordance with the EITI, meaning that oil production and revenues are to follow the most transparent model applied in the otherwise non-transparent industry. This is in stark contrast to the Nigerian oil industry.

According to the declaration, "the use of funds received by our respective governments from activities within the joint development zone shall be monitored and audited, with such audits being made public in accordance with the laws of our respective states." This places a heavy transparency clause on the public spending of both governments.

Further, the declaration obliges the joint authority to "make public the basis for all awards of interest in the Joint Development Zone including the technical and due diligence analysis supporting such awards. All bids and supporting data, other than geological or similar proprietary data, shall be made public."

All information, which is to be made public pursuant to this declaration, shall be posted and maintained on the website of the Joint Development Authority, the declaration goes on. The clauses in the declaration will make the joint zone one of the world’s most transparent oil production regimes. This, the presidents say, was made "in recognition of the importance that our civil society attaches to the transparency in oil revenue management."

Another reason for Nigeria’s government to pay special attention to oil revenue, the World Bank says is the volatility of oil prices. In Nigeria, oil accounts for more than 90 percent of its exports, 25 percent of its GDP, and 80 percent of its public revenues. Thus, a small oil price increase can have a large impact. A US one dollar increase in the oil price in the early 1990s increased Nigeria’s foreign exchange earnings by about $650- million (2 percent of GDP) and its public revenues by $320-million a year. Nigeria’s reliance on oil production for income generation clearly has serious implications for its economic policy management.

In resource-based economies, such as those dependent on oil, exports and government revenues, are uncertain and highly volatile.

This volatility can, however, be managed by an oil stabilisation fund, which complements the hedging.

This reminder of the IMF’s Second Policy Support Instrument has become necessary so we can have a basis to examine the third PSI. Keep a date next week.

http://www.businessdayonline.com/?c=53&a=15303