Declining Excess Crude Account highlights economic exposure to shocks – Analysts

Analysts have said the declining Excess Crude Account (ECA) highlight vulnerability of the nation’s economic prosperity and growth to shocks. ECA  declined to $72 million on February 19th, from $365 million on January 16th, 2020.

Global movement in prices of oil exposes the nation’s economic performance to key risks which include revenue, currency and growth.

Data from Sovereign Wealth Fund indicates that ECA had pitched at $20 billion in its early day in January 2009. By January 2019, the accounts has nosedived to $500 million.

MarketForces gathered that ECA is dropping due to low foreign receipts from oil and weak non-oil revenue performance in the recent time.

Though, the Nigeria’s economy is well diversified but majorly powered by dollar receipts from sales of crude.

Analysts said receipts from oil still account for some 80% of government revenues despite the fact the economic base is diversified.

The nation’s ECA dropped off just at the time when government indicates intention to raise fund from foreign and multinational investors.

In a review, an equity research analyst at Tellimer , Ayodeji Dawodu said that fall in ECA signal the nation’s economic vulnerability to shocks.

Nigeria’s ECA balance fell to US$72 million on 19 February 2020, down from US$325 million on 16 January 2020, according to the disclosure by the Federal Account Allocation Committee.

Dawodu recalled that ECA balance was US$500 million in January 2019 and US$20 billion in January 2009.

Retracing the history, record shows that ECA was established in 2004 by former President Olusegun Obasanjo to save excess oil revenues above the benchmark in the annual budget.

The overriding objective of ECA is insulating the country from economic shocks that may arise from volatility in crude oil prices in international markets.

“Overall, the continued decline in the ECA in recent years appears to signal revenue pressures and challenges at all levels of the government, which the administration may struggle to improve drastically in the near term.

“This may point to increased borrowings and wider fiscal deficits to support the much needed capital expenditure to structurally transform a stagnant economy, while concerns still linger on Nigeria’s debt servicing to revenue ratio”, Tellimer’s analyst said.

With Nigeria’s fiscal buffer virtually empty, the economy is significantly at risk to exogenous shocks as oil prices appear to be weighed down by US shale oil production.

Analyst said domestic oil production growth is likely to remain uninspiring due to regulatory uncertainty and unfavourable fiscal terms.

“Consequently, the government has intensified efforts to boost non-oil revenues to support its medium-term spending plans, which includes the recent 67% increase in the national minimum wage.

“Increasing tax revenues has become a key focus for the current administration in particular, with the VAT rate rising to 7.5% from 5% earlier this month.

“There have also been efforts to reclaim up to US$20bn in back taxes and royalties from oil companies owed to local states”, Dawodu stated.

It would be recalled that between fiscal year 2009-2014, despite Brent oil prices averaging US$95 barrel per litre versus an average benchmark budget oil price of US$55.6 barrel per litre, Nigeria’s ECA balance fell to US$2.45 billion at the end of December 2014

The excess revenues were used for fuel subsidy payments, debt financing, power projects, and security and was distributed among the three tiers of the government to augment revenue shortfalls.

Meanwhile, subsidy payment has gone up and necessary structural reforms needed to eliminate the issue in crude oil supply chain remains a key issue begging for attention.

Declining Excess Crude Account highlights economic exposure to shocks by Julius Alagbe