By W.A Wijewardena –
The Nigerian news that shocked the world
During the last 12 month period, three pieces of news coming from Nigeria shocked the world. The first was the sacking of the Nigeria’s Central Bank Governor, Lamido Sanusi, by Nigeria’s President Goodluck Jonathan in February 2014. His crime: Warning the government that billions of dollars in oil revenue due to the Treasury had been stolen at the Nigerian National Petroleum Corporation or NNPC. Thus, his hint was that culprits who had committed this theft had been associates of the incumbent President.
But the charge on which Sanusi was sacked by President was something else: that is, Sanusi’s financial recklessness and not those NNPC whilst being the Governor of the Nigerian Central Bank.
The second was related to the first from a different side. The first was the theft of the revenue from the legally exported oil. The second was the theft of the oil produced in Nigeria, the largest oil producer in Africa, before it is being exported. While this had been in the news for some time, no action had been taken by the Nigerian government to prevent it. As early as October 2013, Nigeria’s President Jonathan himself had admitted that the theft of oil had cost the country in the region of £ 1 billion or $ 1.65 billion a month. This is about 20% of the country’s annual earnings from petroleum exports and about 4% of its now rebased GDP.
The third had been undertaken by Nigeria disregarding the negative impact which the first two had exerted on Nigerian economy. That it had done by changing the base year of calculating its GDP to 2013, a revision which it had done after 23 years. This rebasing of GDP has crowned the country as the biggest economy in Africa and the 26th largest economy in the world. Consequently, it has pushed South Africa – the champion who had held the title of being the largest African economy so far – to the second place. Thus, Nigeria’s GDP increased overnight from $ 270 billion in 2012 to $ 510 billion in 2013. A consequential change was that its per capita GDP too increased dramatically from $ 1555 in 2012 to $ 2688 in 2013.
Nigeria is at the bottom of good governance practices in the world
All these three events are related to good governance and in the case of Nigeria, they relate to the absence of good governance.
According to the Worldwide Governance Indicators compiled by the World Bank, Nigeria is ranked within the worst 30% and in some cases within the worst 10% of the countries with respect to all the six indicators of governance. According to these indicators, a country’s governance score ranges from minus 2.5 (worst) to plus 2.5 (best). The most recent indicators relating to 2012, gives the following values in the minus range for Nigeria: For Voice and Accountability, minus 0.73; For Political Stability, Absence of Violence and Terrorism, minus 2.05; For Government Effectiveness, minus 1.00; For Regulatory Quality, minus 0.72; For Rule of Law, minus 1.18; and for Control of Corruption, minus 1.18. According to a summary tabulation of different aspects of governance, corruption and rule of law, Nigeria is ranked within the world’s 10 worst countries.
Discovery of oil boosted hopes but it has killed Nigeria’s economy over the years
Nigeria’s oil history is a pathetic story right from the beginning. It also shows how the disregard of good governance could destroy a country even when it has discovered a vast deposit of a natural resource. Normally, when such a resource is discovered, it is natural for everyone to feel that it would end all its economic and social woes and lay a firm foundation for a new beginning. In fact, Nigeria’s politicians, like those in Sri Lanka and elsewhere, heavily capitalised on the discovery and marketed it to the people as ‘dawning of a new era’. This was in early 1960s. Fifty years since then, the story is different with a brutal shattering of all those hopes. In February, 2013, Nigeria’s Association of Chambers of Commerce, Industry, Mines and Agriculture, known as NACCIMA, came out with the charge that the oil sector was killing the whole Nigerian economy silently.
The reason was the prominent place acquired by newly earned Petro-dollars – dollars earned by exporting petroleum resources – in the country’s public policy causing a decline in agricultural exports and industrial production since mid 1960s. Economists call this situation Dutch Disease, a term coined by reference to the displacement of traditional economic activities in the Netherland after that country had discovered a vast natural gas resource in the North Sea in 1970s.
The double hazards: Stealing oil revenue and stealing oil
Thus, what has happened in Nigeria is the replication of Dutch Disease after its petroleum resource discovery. Prior to this, Nigeria was a typical agriculture based developing country which had depended mainly on earnings from exporting primary agricultural commodities. With oil, both commercial agriculture and industry were neglected and as a result by 2000, about 98% of Nigeria’s export earnings were derived from exporting oil products. Initially, oil sector was controlled by two giant international oil companies, namely, Shell and British Petroleum, which had got concessions from the Nigerian government.
However, in 1971, the Nigerian Federal Government nationalised the oil industry by creating ‘Nigerian National Oil Corporation’. With an authoritarian military government in power, the government’s, and hence those in the government, power over the oil sector was consolidated within the next decade. It thus gave an opportunity for politically powerful elite groups at both federal and state levels to siphon off the oil revenue for their personal benefits.
Accordingly, the profits from the oil sector were appropriated by these groups leaving no benefit to the Nigerians at large. On top of this, the very same group was engaged in stealing oil produced in oil wells thereby denying a substantial amount of oil revenue to the country.
Lamido Sanusi comes to the picture as the Governor of the Central Bank of Nigeria when the country had been hit by these double hazards.
Lamido Sanusi: The so called non-conventional practical central banker
Sanusi was a career banker picked up for the job in 2009 in the height of the financial crisis. He took pleasure in calling himself a ‘non-conventional practical man not infected by non-working economic theories’. What he meant was that he was a rebel and ready to try any experiment if it worked for the country. This non-conventional wisdom was shown by him when IMF advised to depreciate the Nigerian currency, Naira, in 2009. Sanusi refused the suggestion claiming that Nigeria’s balance of payments depended on export of oil products and the change in the exchange rate has no bearing on such exports.
Further, he claimed that if Naira is depreciated it will push up the costs of imported products thereby accelerating inflation in the country.
However, those who are conversant with economic policy practices would know that both these reasons adduced by Sanusi are not non-conventional. They simply reflect the conventional wisdom of the man in the street who believes that the depreciation of a currency is a loss of national pride and a way to increase inflation. However, his so called non-conventional policies rewarded him well. He was awarded the Best Central Bank of Governor of Africa and the Central Bank Governor of the Year by London based Banker Magazine in 2011.
Sanusi reveals that oil revenue has been stolen at government Oil Corporation
Sanusi of course raised the oil theft issue with good intentions. He explained this in an address he delivered at an investors’ conference organised by one of Nigeria’s largest banks, namely, The Standard Bank, in February 2014. About 80% of the revenue of the Nigerian Federal Government comes from the oil sector. If oil money is stolen midway, it affects the government budget adversely.
Sanusi claims that he was able to bring Nigeria’s inflation to a single digit level – that is, below 10% per annum – since early 2012. The tight monetary policy which the Central Bank of Nigeria has taken had delivered this good result to the country. This will be compromised if the government budget goes haywire due to an insufficiency of revenue. The theft of oil revenue has been one of the reasons for the insufficiency of government revenue. In this regard, Nigerian National Petroleum Corporation, NNPC, has failed to remit $ 20 billion to the Federal Treasury and this has caused a serious concern about the governance practices in public enterprises.
The good-intentioned report to President by Sanusi
Sanusi, as a responsible central banker, brought to the notice of President Jonathan the continuing theft of oil revenue by an apparent fraudulent activity at NNPC. This has amounted to $ 1 billion per month according to his estimates. Nigeria had had the benefit of high oil prices but its oil revenue, and consequently the revenue of the government, had continuously declined. His memo to the President had claimed that this anomaly cannot be explained by the partial fluctuations in the oil production. As a result of declining oil revenue, government budget had not got the required revenue; it added pressure for Nigerian Naira to depreciate in the market.
Hence, his advice to the President was to put a stop to the continuing theft of oil revenue by those in NNPC. The implication was that if it is not done promptly, the country will have to sacrifice the hard-earned low inflation regime.
The good report is badly taken by the government
In any country with good governance practices, such a memo from the central bank governor would have been welcome and acted upon. But it was not the case with Nigeria. The Managing Director of NNPC immediately issued a counter-charge that Sanusi did not understand the technicalities of oil production and sales. He further charged that the Central Bank of Nigeria has ventured into auditing government corporations which was not its duty.
However, after Sanusi’s revelations, several private analysts who tried to reconcile the reported revenue by NNPC with the import of oil by Nigeria’s trading partners found that NNPC revenue was much lower than what had been paid by foreign importers of Nigerian oil. The shortfalls are assumed to have been retained outside the country by an elite group belonging to President Jonathan’s inner circles.
President Jonathan, instead of initiating an investigation into the charges made by Sanusi, hit back by asking Sanusi to resign from Governor’s post. But Sanusi had refused to do so claiming that such a directive should come not from the President but from the Senate according to the constitution.
Authoritarian rulers don’t respect constitutional provisions
But such a constitutional nicety would be observed only in a country where there is good governance in practice and the observance of the rule of law by the government. Nigeria was not such a country. Hence, Jonathan acting on his powers suspended Sanusi from the post of the Central Bank Governor in February 2014 and informed the Senate of his decision. The Senate did not come to rescue Sanusi as required but silently approved of the measure taken by Jonathan. Those are the powers exercised by authoritarian rulers everywhere in the world. Even the elected representatives offer a yielding hand to such powerful authoritarian rules to violate the provisions of the laws of the country.
Another example for such authoritarian action was the removal of the Governor of Bank Indonesia, Sudradjad Djiwandono, by President Suharto in 1997 when the good intentioned Governor tried to close down 16 bankrupt banks in the country. The sin committed by Governor was that he tried to interfere in banks which had been owned either by close family members of President Suharto or by his close associates.
This story was discussed by this writer in a previous article titled ‘Bank Capital is not a panacea: Good governance and regulatory wisdom more important’ in this series. Both Sanusi and Djiwandono would have survived had they not ventured into challenging the powers of those who are close to the topmost powerful man in the country.
Rebasing should not necessarily increase the size of the economy
In the midst of allegations against the theft of oil revenue and sacking of the Central Bank Governor, Nigeria has rebased its GDP calculations to 2013 increasing the size of the economy also by about 89% as mentioned above. Rebasing of GDP calculations periodically is a normal activity but in other countries it does not increase the size of the economy dramatically as has been done in Nigeria.
For instance, when GDP numbers were calculated by the Central Bank of Sri Lanka prior to 2007, on several occasions, GDP calculations were rebased without increasing the size of the economy dramatically. In 1982, the previous GDP series which was based on the base year 1970 was rebased after 12 years. The total size of the economy was increased only from Rs. 85 billion to Rs. 99 billion or from $ 4.4 billion to $ 4.8 billion.
Again, the data series was rebased in 1996 after another 14 years. This resulted in increasing GDP from Rs. 668 billion in 1995 to Rs. 768 billion in 1996 or from $ 13.0 billion to $ 13.9 billion. The third revision was done by the Department of Census and Statistics in 2002 after six years. The GDP increased from Rs. 1,407 billion in 2001 to Rs. 1,582 billion in 2002 or from $ 15.8 billion to $ 16.5 billion. Thus, there is no necessity for a country to dramatically increase the size of the economy simply because it has rebased its GDP calculations.
Sri Lanka’s dreams about discovering oil in Mannar Basin
Sri Lanka is set to prospecting its oil and gas resources in Mannar Basin by 2020. This is expected to make Sri Lanka energy self sufficient and it is the hope of every Sri Lankan citizen. The top policy makers of the government have projected that this discovery will eliminate the country’s gaping trade deficit entirely and generate a surplus in the current account of its balance of payments. When Sri Lanka has a surplus in the current account, it means that the country is transformed from a borrower nation in the international markets to a lender nation. Hence, these are high hopes entertained by all and sundry.
The need: good governance and a non-yielding central bank
But all these high hopes will evaporate into thin air if the country will not have good governance practices in place and the country’s central bank does not perform its statutory duty, respected by those in power as was announced by Dr. N.M. Perera, Finance Minister during 1970-75 at a meeting with Central Bank officers in 1971.
This is the lesson which Sri Lanka has to learn from Nigeria. This writer has repeatedly pointed this out in this series of articles. One such article is the experience of Venezuela which has become economically bankrupt despite its huge oil resources, like Nigeria.
*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com