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Lesson from Nigeria: Discovery of a natural

resource by a country without good


governance is a curse
September 22, 2014
The Nigerian news that shocked the world
During the last 12 month period, three pieces of news coming from Nigeria
shocked the world.
The rst was the sacking of the Nigeria!s "entral #ank $o%ernor, &amido
Sanusi, b' Nigeria!s (resident $oodluck )onathan in *ebruar' 2014
+a%ailable at, http,--www.n'times.com-2014-02-21-world-africa-go%ernor.of.
nigerias.central.bank.is.red.after.warning.of.missing.oil.re%enue.html/
0r10 2. 3is crime, 4arning the go%ernment that billions of dollars in oil
re%enue due to the Treasur' had been stolen at the Nigerian National
(etroleum "orporation or NN(". Thus, his hint was that culprits who had
committed this theft had been associates of the incumbent (resident.
#ut the charge on which Sanusi was sacked b' (resident was something
else, that is, Sanusi!s nancial recklessness and not those NN(" whilst
being the $o%ernor of the Nigerian "entral #ank +a%ailable at,
http,--www.cknnigeria.com-2014-02-poserdo.'ou.support.lamido.sanusis.
sack.html2.
The second was related to the rst from a di5erent side. The rst was the
theft of the re%enue from the legall' e6ported oil. The second was the theft
of the oil produced in Nigeria, the largest oil producer in 7frica, before it is
being e6ported. 4hile this had been in the news for some time, no action
had been taken b' the Nigerian go%ernment to pre%ent it. 7s earl' as
8ctober 2019, Nigeria!s (resident )onathan himself had admitted that the
theft of oil had cost the countr' in the region of : 1 billion or ; 1.<= billion a
month +a%ailable at, http,--www.theguardian.com-global.
de%elopment-2019-oct-0<-oil.theft.costs.nigeria2. This is about 20> of the
countr'!s annual earnings from petroleum e6ports and about 4> of its now
rebased $D(.
The third had been undertaken b' Nigeria disregarding the negati%e impact
which the rst two had e6erted on Nigerian econom'. That it had done b'
changing the base 'ear of calculating its $D( to 2019, a re%ision which it
had done after 29 'ears. This rebasing of $D( has crowned the countr' as
the biggest econom' in 7frica and the 2<th largest econom' in the world.
"onse?uentl', it has pushed South 7frica @ the champion who had held the
title of being the largest 7frican econom' so far @ to the second place. Thus,
Nigeria!s $D( increased o%ernight from ; 2A0 billion in 2012 to ; =10 billion
in 2019. 7 conse?uential change was that its per capita $D( too increased
dramaticall' from ; 1=== in 2012 to ; 2<BB in 2019 +a%ailable at,
http,--www.theguardian.com-global.de%elopment-2019-oct-0<-oil.theft.
costs.nigeria2.
Nigeria is at the bottom of good go%ernance practices in the world
7ll these three e%ents are related to good go%ernance and in the case of
Nigeria, the' relate to the absence of good go%ernance.
7ccording to the 4orldwide $o%ernance Cndicators compiled b' the 4orld
#ank, Nigeria is ranked within the worst 90> and in some cases within the
worst 10> of the countries with respect to all the si6 indicators of
go%ernance +a%ailable at,
http,--info.worldbank.org-go%ernance-wgi-inde6.asp6Dreports 2. 7ccording
to these indicators, a countr'!s go%ernance score ranges from minus 2.=
+worst2 to plus 2.= +best2. The most recent indicators relating to 2012, gi%es
the following %alues in the minus range for Nigeria, *or Eoice and
7ccountabilit', minus 0.A9F *or (olitical Stabilit', 7bsence of Eiolence and
Terrorism, minus 2.0=F *or $o%ernment G5ecti%eness, minus 1.00F *or
Hegulator' Iualit', minus 0.A2F *or Hule of &aw, minus 1.1BF and for "ontrol
of "orruption, minus 1.1B. 7ccording to a summar' tabulation of di5erent
aspects of go%ernance, corruption and rule of law, Nigeria is ranked within
the world!s 10 worst countries +a%ailable at, http,--ends.ng-nigeria.ranks.
bottom.10.in.the.world.in.almost.e%er'thing.to.act.or.gi%e.up-2.
Disco%er' of oil boosted hopes but it has killed Nigeria!s econom' o%er the
'ears
Nigeria!s oil histor' is a pathetic stor' right from the beginning. Ct also
shows how the disregard of good go%ernance could destro' a countr' e%en
when it has disco%ered a %ast deposit of a natural resource. Normall', when
such a resource is disco%ered, it is natural for e%er'one to feel that it would
end all its economic and social woes and la' a rm foundation for a new
beginning. Cn fact, Nigeria!s politicians, like those in Sri &anka and
elsewhere, hea%il' capitalised on the disco%er' and marketed it to the
people as Jdawning of a new era!. This was in earl' 1K<0s. *ift' 'ears since
then, the stor' is di5erent with a brutal shattering of all those hopes. Cn
*ebruar', 2019, Nigeria!s 7ssociation of "hambers of "ommerce, Cndustr',
Lines and 7griculture, known as N7""CL7, came out with the charge that
the oil sector was killing the whole Nigerian econom' silentl' +a%ailable at,
http,--allafrica.com-stories-201902190K2K.html2.
The reason was the prominent place ac?uired b' newl' earned (etro.dollars
@ dollars earned b' e6porting petroleum resources @ in the countr'!s public
polic' causing a decline in agricultural e6ports and industrial production
since mid 1K<0s. Gconomists call this situation Dutch Disease, a term
coined b' reference to the displacement of traditional economic acti%ities in
the Netherland after that countr' had disco%ered a %ast natural gas
resource in the North Sea in 1KA0s.
The double haMards, Stealing oil re%enue and stealing oil
Thus, what has happened in Nigeria is the replication of Dutch Disease after
its petroleum resource disco%er'. (rior to this, Nigeria was a t'pical
agriculture based de%eloping countr' which had depended mainl' on
earnings from e6porting primar' agricultural commodities. 4ith oil, both
commercial agriculture and industr' were neglected and as a result b'
2000, about KB> of Nigeria!s e6port earnings were deri%ed from e6porting
oil products. Cnitiall', oil sector was controlled b' two giant international oil
companies, namel', Shell and #ritish (etroleum, which had got concessions
from the Nigerian go%ernment.
3owe%er, in 1KA1, the Nigerian *ederal $o%ernment nationalised the oil
industr' b' creating JNigerian National 8il "orporation!. 4ith an
authoritarian militar' go%ernment in power, the go%ernment!s, and hence
those in the go%ernment, power o%er the oil sector was consolidated within
the ne6t decade. Ct thus ga%e an opportunit' for politicall' powerful elite
groups at both federal and state le%els to siphon o5 the oil re%enue for their
personal benets.
7ccordingl', the prots from the oil sector were appropriated b' these
groups lea%ing no benet to the Nigerians at large. 8n top of this, the %er'
same group was engaged in stealing oil produced in oil wells thereb'
den'ing a substantial amount of oil re%enue to the countr'.
&amido Sanusi comes to the picture as the $o%ernor of the "entral #ank of
Nigeria when the countr' had been hit b' these double haMards.
&amido Sanusi, The so called non.con%entional practical central banker
Sanusi was a career banker picked up for the Nob in 200K in the height of
the nancial crisis. 3e took pleasure in calling himself a Jnon.con%entional
practical man not infected b' non.working economic theories!. 4hat he
meant was that he was a rebel and read' to tr' an' e6periment if it worked
for the countr'. This non.con%entional wisdom was shown b' him when CL*
ad%ised to depreciate the Nigerian currenc', Naira, in 200K. Sanusi refused
the suggestion claiming that Nigeria!s balance of pa'ments depended on
e6port of oil products and the change in the e6change rate has no bearing
on such e6ports.
*urther, he claimed that if Naira is depreciated it will push up the costs of
imported products thereb' accelerating inOation in the countr' +a%ailable
at, http,--www.africanre%iew.com-nancial-banking.a.nance-banking.
reforms.embrace.best.practices2.
3owe%er, those who are con%ersant with economic polic' practices would
know that both these reasons adduced b' Sanusi are not non.con%entional.
The' simpl' reOect the con%entional wisdom of the man in the street who
belie%es that the depreciation of a currenc' is a loss of national pride and a
wa' to increase inOation. 3owe%er, his so called non.con%entional policies
rewarded him well. 3e was awarded the #est "entral #ank of $o%ernor of
7frica and the "entral #ank $o%ernor of the Pear b' &ondon based #anker
LagaMine in 2011.
Sanusi re%eals that oil re%enue has been stolen at go%ernment 8il
"orporation
Sanusi of course raised the oil theft issue with good intentions. 3e
e6plained this in an address he deli%ered at an in%estors! conference
organised b' one of Nigeria!s largest banks, namel', The Standard #ank, in
*ebruar' 2014 +a%ailable at,
http,--allafrica.com-stories-2014020<00KK.html2. 7bout B0> of the re%enue
of the Nigerian *ederal $o%ernment comes from the oil sector. Cf oil mone'
is stolen midwa', it a5ects the go%ernment budget ad%ersel'.
Sanusi claims that he was able to bring Nigeria!s inOation to a single digit
le%el @ that is, below 10> per annum @ since earl' 2012. The tight monetar'
polic' which the "entral #ank of Nigeria has taken had deli%ered this good
result to the countr'. This will be compromised if the go%ernment budget
goes ha'wire due to an insuQcienc' of re%enue. The theft of oil re%enue
has been one of the reasons for the insuQcienc' of go%ernment re%enue. Cn
this regard, Nigerian National (etroleum "orporation, NN(", has failed to
remit ; 20 billion to the *ederal Treasur' and this has caused a serious
concern about the go%ernance practices in public enterprises.
The good.intentioned report to (resident b' Sanusi
Sanusi, as a responsible central banker, brought to the notice of (resident
)onathan the continuing theft of oil re%enue b' an apparent fraudulent
acti%it' at NN(". This has amounted to ; 1 billion per month according to
his estimates +a%ailable at, http,--www.ft.com-cms-s-0-<c4aeaA2.K9cd.11e9.
a0e1.00144feabAde.htmlDa6MM9DmPo4BB*2. Nigeria had had the benet of
high oil prices but its oil re%enue, and conse?uentl' the re%enue of the
go%ernment, had continuousl' declined. 3is memo to the (resident had
claimed that this anomal' cannot be e6plained b' the partial Ouctuations in
the oil production. 7s a result of declining oil re%enue, go%ernment budget
had not got the re?uired re%enueF it added pressure for Nigerian Naira to
depreciate in the market.
3ence, his ad%ice to the (resident was to put a stop to the continuing theft
of oil re%enue b' those in NN(". The implication was that if it is not done
promptl', the countr' will ha%e to sacrice the hard.earned low inOation
regime.
The good report is badl' taken b' the go%ernment
Cn an' countr' with good go%ernance practices, such a memo from the
central bank go%ernor would ha%e been welcome and acted upon. #ut it
was not the case with Nigeria. The Lanaging Director of NN(" immediatel'
issued a counter.charge that Sanusi did not understand the technicalities of
oil production and sales. 3e further charged that the "entral #ank of
Nigeria has %entured into auditing go%ernment corporations which was not
its dut'.
3owe%er, after Sanusi!s re%elations, se%eral pri%ate anal'sts who tried to
reconcile the reported re%enue b' NN(" with the import of oil b' Nigeria!s
trading partners found that NN(" re%enue was much lower than what had
been paid b' foreign importers of Nigerian oil. The shortfalls are assumed to
ha%e been retained outside the countr' b' an elite group belonging to
(resident )onathan!s inner circles.
(resident )onathan, instead of initiating an in%estigation into the charges
made b' Sanusi, hit back b' asking Sanusi to resign from $o%ernor!s post.
#ut Sanusi had refused to do so claiming that such a directi%e should come
not from the (resident but from the Senate according to the constitution.
7uthoritarian rulers don!t respect constitutional pro%isions
#ut such a constitutional nicet' would be obser%ed onl' in a countr' where
there is good go%ernance in practice and the obser%ance of the rule of law
b' the go%ernment. Nigeria was not such a countr'. 3ence, )onathan acting
on his powers suspended Sanusi from the post of the "entral #ank
$o%ernor in *ebruar' 2014 and informed the Senate of his decision. The
Senate did not come to rescue Sanusi as re?uired but silentl' appro%ed of
the measure taken b' )onathan. Those are the powers e6ercised b'
authoritarian rulers e%er'where in the world. G%en the elected
representati%es o5er a 'ielding hand to such powerful authoritarian rules to
%iolate the pro%isions of the laws of the countr'.
7nother e6ample for such authoritarian action was the remo%al of the
$o%ernor of #ank Cndonesia, SudradNad DNiwandono, b' (resident Suharto in
1KKA when the good intentioned $o%ernor tried to close down 1< bankrupt
banks in the countr'. The sin committed b' $o%ernor was that he tried to
interfere in banks which had been owned either b' close famil' members of
(resident Suharto or b' his close associates.
This stor' was discussed b' this writer in a pre%ious article titled J#ank
"apital is not a panacea, $ood go%ernance and regulator' wisdom more
important! in this series +a%ailable at, http,--www.ft.lk-2014-0B-11-bank.
capital.is.not.a.panacea-2. #oth Sanusi and DNiwandono would ha%e
sur%i%ed had the' not %entured into challenging the powers of those who
are close to the topmost powerful man in the countr'.
Hebasing should not necessaril' increase the siMe of the econom'
Cn the midst of allegations against the theft of oil re%enue and sacking of
the "entral #ank $o%ernor, Nigeria has rebased its $D( calculations to
2019 increasing the siMe of the econom' also b' about BK> as mentioned
abo%e. Hebasing of $D( calculations periodicall' is a normal acti%it' but in
other countries it does not increase the siMe of the econom' dramaticall' as
has been done in Nigeria.
*or instance, when $D( numbers were calculated b' the "entral #ank of Sri
&anka prior to 200A, on se%eral occasions, $D( calculations were rebased
without increasing the siMe of the econom' dramaticall'. Cn 1KB2, the
pre%ious $D( series which was based on the base 'ear 1KA0 was rebased
after 12 'ears. The total siMe of the econom' was increased onl' from Hs.
B= billion to Hs. KK billion or from ; 4.4 billion to ; 4.B billion.
7gain, the data series was rebased in 1KK< after another 14 'ears. This
resulted in increasing $D( from Hs. <<B billion in 1KK= to Hs. A<B billion in
1KK< or from ; 19.0 billion to ; 19.K billion. The third re%ision was done b'
the Department of "ensus and Statistics in 2002 after si6 'ears. The $D(
increased from Hs. 1,40A billion in 2001 to Hs. 1,=B2 billion in 2002 or from
; 1=.B billion to ; 1<.= billion. Thus, there is no necessit' for a countr' to
dramaticall' increase the siMe of the econom' simpl' because it has
rebased its $D( calculations.
Sri &anka!s dreams about disco%ering oil in Lannar #asin
Sri &anka is set to prospecting its oil and gas resources in Lannar #asin b'
2020. This is e6pected to make Sri &anka energ' self suQcient and it is the
hope of e%er' Sri &ankan citiMen. The top polic' makers of the go%ernment
ha%e proNected that this disco%er' will eliminate the countr'!s gaping trade
decit entirel' and generate a surplus in the current account of its balance
of pa'ments. 4hen Sri &anka has a surplus in the current account, it means
that the countr' is transformed from a borrower nation in the international
markets to a lender nation. 3ence, these are high hopes entertained b' all
and sundr'.
The need, good go%ernance and a non.'ielding central bank
#ut all these high hopes will e%aporate into thin air if the countr' will not
ha%e good go%ernance practices in place and the countr'!s central bank
does not perform its statutor' dut', respected b' those in power as was
announced b' Dr. N.L. (erera, *inance Linister during 1KA0.A= at a
meeting with "entral #ank oQcers in 1KA1 +a%ailable at,
http,--www.ft.lk-2019-11-1B-central.bank.as.ad%isor.to.the.go%t.how.and.
what.it.should.ad%ise-2.
This is the lesson which Sri &anka has to learn from Nigeria. This writer has
repeatedl' pointed this out in this series of articles. 8ne such article is the
e6perience of EeneMuela which has become economicall' bankrupt despite
its huge oil resources, like Nigeria +a%ailable at,
http,--www.ft.lk-2014-01-2A-lessons.from.%eneMuela.rich.oil.income.is.not.
an.insurance.against.bad.economic.policies-2.
+4.7. 4iNewardena, a former Deput' $o%ernor of the "entral #ank of Sri
&anka, can be reached at waw1K4KRgmail.com2
Posted by Thavam

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