The Oil Windfall Palaver*

By David Edevbie

Thisday November 12, 2001

Recently, so much has been written about the so-called oil windfall. Unfortunately, most of the critics display a lack of understanding of the subject they are supposed to be discussing. What is worse is that some of the commentators seem to rely on the perceived weight of their offices or personalities to provide support for their otherwise incorrect statements. Unfortunately, many Nigerians accept these misleading contributions and cite them in their own arguments as if they are quoting established facts.

I have observed a lot of such write-ups in our national dailies but I must confess that nothing so far compares with the piece published in the Vanguard of Monday October 22 by one Yushau Shuaib. Judging by the jaundiced interpretation of the constitutional provisions cited by him not to mention the poor grammar, the level of ignorance could not be lower. Incidentally, Mr. Shuaib claims to be Head of Press, Revenue Mobilization, Allocation and Fiscal Commission, Abuja. I am simply astounded that someone who writes as poorly as that can occupy the position he claims. Nevertheless, I believe that I got the gist of the argument he tried to peddle and I will concentrate on correcting the wrong impressions that he may have created.

The sum of Mr. Shuaib's argument is that the so-called "excess oil revenue is an unexpected and unbudgeted proceeds to the national coffer" which should be kept to take care of the rainy day. Though misguided, this statement by itself was not altogether harmful, until Mr. Shuaib sought vainly to find constitutional support for his assertion by referring to the provisions of section 162 of the 1999 Constitution. Like all the other Federal apologists, he sought to first vilify the 36 state governors for their stand on the issue. Then, he quoted a remark which he said was made by the Chairman Revenue Mobilization, Allocation and Fiscal Commission, Alhaji Hamman Tukur to the effect that "there is nothing to be christened Oil Windfall because budgetary projections are made based on certain estimated amount, therefore anything that is realized outside the projected estimate cannot be labeled a windfall but can be transferred to the Stabilisation Account, which in the yet-to-be passed revenue formula, is called National Reserve Fund .. ". I hope someone can make sense of this because I couldn't - except to note that it appears that the fellows at the Commission are asking the governors to obey a yet-to-be-passed Act. Of course this is absurd.

For the purposes of enlightening fellow Nigerians on the issue that has been generating some tension since the beginning of the year, I shall focus on the arguments as made at different times by Federal Government and the Central Bank of Nigeria (CBN) officials. 'Excess crude oil proceeds' or 'oil windfall' as it has come to be known is a relatively new entry into our national lexicon and has since the beginning of 2001 become a matter for passionate debate. I daresay that very few of the enlightened and eminent contributors to the debate on what to do with this revenue or windfall as they choose to refer to it really know what it is all about. By way of background, in preparing the annual budget in Nigeria, the Federal Government considers various oil price scenarios, because oil revenue is the main revenue factor. Whatever price is adopted in the wisdom of the Federal Government remains an assumption. This assumption could be wisely conservative or mindlessly bullish. For example, it is on record that the National Assembly amended the assumed oil price presented by the Federal Government from $18 to $22 per barrel when it was considering the year 2000 budget. It is extremely important to note that the price chosen by the Federal Government is certainly not binding on the other tiers of government. Indeed, each state government for instance, is free to make its own independent assumptions about future oil prices or any other key factors for its own budget. Oil revenue is received by the Government of the Federation on behalf of all tiers of government and in accordance with the provisions of section 162(1) of the 1999 Constitution ought to be paid in full into the Federation Account to be distributed in strict compliance with the approved revenue formula under section 162(2) of the Constitution. Aside from a few very clear exceptions, nowhere does the Constitution permit the Federal Government to set aside any revenue from the Federation Account. It must be emphasized that the Federation Account does not belong to the Federal Government. It is beneficially kept by it for all the three tiers of government in Nigeria. The practice of diverting part of oil revenue receipts from the federation account to dedicated accounts is actually a throwback to the military era. Nigerians know today that this led to the misuse of such revenues by the military administrations especially in what has come to be known as the Gulf war windfall. Apparently borrowing from the military example, the present Federal Government initially unconstitutionally credited to the Federation Account for distribution only the revenue based on its budgeted oil price and kept the balance in what can best be described as a secret reserve. It was only when the other tiers of government objected to this practice that the Federal Government started declaring such revenue as excess crude oil proceeds.

I do not know if Mr. Shuaib showed his piece to his boss, Alhaji Hamman Tukur before releasing it to the press, otherwise he could not have contradicted his boss whom I take liberty to quote verbatim here. In the Executive Summary of the Review of the Revenue Allocation Formula report recently submitted to the President by the Revenue Mobilisation Allocation and Fiscal Commission he had this to say, "The present mode of management of the federation account leaves much to be desired. The stakeholders (other than the Federal Government) do not seem to have access to computations on which certain first line charges and deductions are made on the federation account. This lack of transparency has led States and Local Governments to hold the strong view that not all monies meant for the federation account actually accme to it. The concept of 'gross' and 'net' accruals recently introduced by the Federal Ministry of Finance heightens such speculations. The Constitution (Sections 162 (1) and 162 (10)) is clear on accruals to and disbursements from the federation account. Under no circumstances this revenue meant for tf~e federatior' account be set aside for any purpose other that' what the constitution allows. In this regard, it appears that those admi,?istering the Federation Account Allocation Committee have taker' more than what the law establishing it stipulates." (Italics mine). The 36 State Governors could not be more vindicated than by this comment.

A very important point to note is the distinction between the federation account (which belongs to all tiers of government) and the consolidated revenue funds. Confusion arises when the two are treated as if they are one and the same thing as the Federal Government deliberately does when it is in its interest to do so. It is from the distribution of the federation account revenue that each government in the federation receives the bulk of the funding of their budgets. Section 80 (1) of the 1999 Constitution creates the Consolidated Revenue Fund of the Federation (CRFF). Based on the assumption made on oil price by the Federal Government and using the approved revenue sharing formula, it estimates the revenue that will accrue to it during the year. This estimated share funds the CRFF together with other independently retained revenue. Section 80 sub-sections (2-4) give the National Assembly power to appropriate funds from the CRFF. The Appropriation Act empowers the President to draw funds from the CRFF to meet expenditures of the Federal Government. Similarly, section 120(1) creates the Consolidated Revenue Fund of state governments (CRFS). The revenue received by each state government from the Federation Account is credited to its consolidated revenue fund together with its internally generated revenue. No money can be spent from the consolidated revenue fund of the state unless it is authorized by a Law passed by the State House of Assembly in accordance with section 120 subsections (2-4).

From the foregoing, it is very clear that the federation account is very distinct from consolidated revenue funds and that the powers to appropriate fund by either the National Assembly or the State Houses of Assembly are exercisable over only consolidated revenue funds and not over the federation account. Section 162(2) on the other hand provides for the process of arriving at the approved revenue sharing formula, which should be applied, to the federation account. The approved formula is a hundred per cent distribution of the federation account. Any attempt to suggest otherwise is simply mischievous. Where actual receipt from the account by any tier of government exceeds what had been estimated and appropriated by the National or State Assembly from its consolidated revenue fund, the balance becomes a surplus for that government which cannot be spent except through a supplementary appropriation.

As lovers of democracy and the rule of law, we should always be concerned that no one, no matter how highly placed flouts the provisions of our constitution. It would even be worse if we allow apparent benevolent public officers to disobey constitutional provisions in the misguided belief that they mean well for our nation. What sort of society would we have if people believe that out of their overflowing love and sense of patriotism, they can flout constitutional provisions? In other words, even before we debate the sense of patriotism that informs such blatant illegality, we should express our deep concern over this tendency at the federal level. Having shown that withholding some oil revenue from the federation account by the Federal Government is unconstitutional, we can now evaluate the reason given for such behaviour, not because it would mitigate the damage but only to help us understand how misguided love can lead to murder.

It has been argued loud enough by the CBN that the distribution of the 'excess oil proceeds' among the various tiers of government would lead to inflation and a devaluation of the Naira, an argument that Mr Shuaib was quick to rehash. To a certain degree I believe the CBN may have been right in linking the full and immediate distribution of the fund at that point in time to potential inflation and devaluation of the Naira but this is only because the CBN fails to do other things that it ought to do without necessarily advising the federal government to break the law.

I have argued before that a number of monetary policies being pursued by the CBN in the guise of controlling excess liquidity in the economy are not based on an accurate diagnosis of what is ailing the economy. Under these circumstances, the CBN may have been treating symptoms while leaving the disease well alone. Is it truly the spending of the Naira translation of the oil revenue that leads to a devaluation of our currency or the abnormal high propensity of Nigerians to patronize foreign goods and services? Even though the revenue is earned in dollars, what the Federal Government does is to distribute the Naira equivalent at an agreed exchange rate to the various tiers of government. If the governments decide to spend their receipts on road construction where bitumen has to come from Ondo State, iron rods from Osogbo, cement from Okpilla and equipment from Abia, would such expenditures necessarily lead to a devaluation of the Naira? Evidently, it is not the distribution of the revenue and its spending that can cause inflation and devaluation of the Naira but the nature of the expenditure which in our case has been an undue reliance on imports. As long as our taste for foreign goods does not abate, and oil remains the sole foreign exchange earner in our economy, our currency may continue to depreciate in relation to other currencies because when the revenue is fmally distributed, it would still be used to fmance imports.

Notwithstanding the above, the CBN argument on devaluation is somewhat disingenuous. How can the distribution of the Naira translation of the oil revenue lead to devaluation of the Naira except the CBN wants to devalue the currency? The foreign currency has already been earned. If CBN funds the foreign exchange market with the dollars that it has translated and distributed, ordinarily the Naira would be devalued. It would seem that devaluation is only possible if the CBN distributes printed notes to the governments without supporting it with foreign exchange earnings. In that case, CBN cannot blame the state governments for the inevitable devaluation that follows.

We have been told that the IMF recently urged the Federal Government not to spend the "oil windfall" immediately, but to save it for stabilization against future periods when oil revenue may fall, another statement that Mr. Shuaib gleefully parroted. It would be rather surprising if our economic experts would interpret this well-meaning advise as a support for an unconstitutional stand on the non-distribution of the revenue among the various tiers of government. There is a clear distinction between how much naira is spent on goods and services produced within the Nigerian economy and the petro-dollars spent on importing goods and services. I believe that what the IMF is cautioning against is an unrestrained upsurge in imports simply because of a favourable oil price. The problem to deal with is therefore how to curtail imports.

David Edevbie is Commissioner for Finance & Economic Planning, Delta State. November 6, 2001.

* Please see the reference article and a response in page 88 and 130