Sunday Magazine

Akpan: Energy transition may force Nigeria into fresh fiscal crisis

The impact of climate change on national security, food security and economy came under focus at a recent workshop in Abuja. In this interview, Executive Director, Project Alert, Tijah- Bolton Akpan, tells ONWUKA NZESHI that Nigeria risks a fresh fiscal crisis unless it reviews its response to climate change

 

 

What should Nigeria be doing at the COP26 holding in Glasgow, Scotland?

 

Climate change is a very important issue for Nigeria, not only because Nigeria is one of the more vulnerable countries because of the poverty level, but also because of some of the environmental and ecological peculiarities of the country.

 

 

There is also another reason for which Nigeria is very vulnerable. It is the exposure of our economy to fossils. Nigeria is largely dependent on revenue from the petroleum sector. More than 90 per cent of our export comes from oil and gas and more than 70 per cent of our budget is funded from oil and gas.

What that means is that the current energy transition which is happening globally; the movement away from fossil fuels to embrace cleaner and renewable energies is going to affect Nigeria adversely. It is not going to affect government at the centre only, but also other levels of government.

 

This is because we run a certain character of federalism where the sub-national level of government has its umbilical cord tied to the centre. What will happen is that there is going to be a ripple effect on the capacity of sub-national governments, especially those that are dependent on derivation revenue.

 

You know the Nigerian Constitution obligates the Federal Government to pay states and local governments 13 per cent revenue on income taken from them. So these exposures are going to happen and there is going to be a constraining of the fiscal space in the years ahead.

 

This is why Nigeria needs to begin to look at a medium to long term economic scenario which does not depend so much on oil and gas.

How serious is this threat?

 

It is very serious. Unfortunately, the issue of corruption has actually worsened those exposures, whereas we make billions from the oil and gas sector. Last year, we made more than $34 billion from oil and gas but we find out that a lot of these revenue receipts are going in the wrong direction. Illicit financial flows are actually taking out a lot of the revenue.

The kind of arrangements we have in the oil and gas sector where contracts are not transparent and where beneficial owners of oil and gas assets are not known, these are also affecting the capacity of that sector to actually contribute as much as it should to national prosperity.

 

So what do we need to do at the conference?

 

The position we need to take as Nigeria goes to COP26 is that: Nigeria needs to reinvest proceeds of corruption in addressing the exit from fossil fuels.

 

The other thing Nigeria needs to do is to send a message to the developed countries at the COP26 that they need to pay Nigeria and other African countries that are dependent on fossil fuels to leave the fossil fuels in the ground.

Already, there are scenarios that have been well researched to show that any continuous investment in high cost oil and gas production for Nigeria will leave our fiscal options very thin.

What that means is that a better option for us would have been for us to use what we passed as Petroleum Industry Act (PIA) recently as a bridge between the fossil fuel dependency of the current time and diversification of the economy and the transition into cleaner, renewable energies in the future. Currently, more than 95 million Nigerians do not have access to electricity.

 

The electrification coverage in Nigeria is just a little above forty percent and this is a country where the energy mix is dependent more than 82.5 per cent on fossil fuels.

 

What this tells us is that there is a huge correlation between what is happening in the extractive sector and the human security options of the Nigeria system. So, Nigeria needs to make that connection as it goes to COP26 and I think that it is a very important opportunity that the country shouldn’t miss.

 

What are those indices that indicate we may be on the wrong path now?

 

One of the things that we have seen happening is the very expensive oil and gas assets that are coming up for grabs again. For instance, the OPL 245, the popular Malabu Oil license has lapsed, but the companies that owned that asset – Shell, Eni and others are still around.

 

Actually, Shell has closed on it and does not want to go on, but Eni wants to go on the same terms of more than 10 years ago. So that will be a very unprofitable direction for Nigeria to go.

 

So it is even more profitable for Nigeria right now to abandon some of these assets instead of investing in them. Like I said earlier, one of the things Nigeria could do is to ask the countries of the Global North to pay for Nigeria to leave those assets in the ground.

 

What about the Carbon Financing or Exchange which was introduced as a compensation for poor countries that do not emit so much gas?

 

What we have is something like Carbon Trading Schemes. These are schemes designed to make this part of the world to absorb the carbon and get paid while the rest of the world continues on its transition to cleaner energies.

 

That is not what we want. What we need is that Nigeria should get some resources from the Global North because they are the ones contributing more to gas emission.

 

Our contribution to the global gas emission is very small and because we are contributing a very tiny percentage to global climate change, those who are contributing the most to global mate change should pay for the cleaning of the mess.

 

One of the things they can do is to invest in our economies in such a way that will allow us to outlive those assets in the ground. Once they are able to put those kinds of investments in the economies of the Global South, especially Africa, then it will now give us fiscal leverage to address our other human development issues such as healthcare, agriculture and education. Those things are actually impacting climate change even further.

 

That’s why the cost of cooking gas has gone over the roof and families are now going back to firewood which will emit more greenhouse gases. We must halt this trend and ensure that Nigeria moves into a cleaner low carbon future.

 

Nigeria has being talking about diversification of its economy for so many years, but with little to show for it. Why do you think this policy has remained a mirage?

 

What we see is that whenever Nigeria is in crisis as we were last year because of COVID-19 and the downturn in oil prices, we saw the government talking a lot about diversification. There will be a lot of conversations around the diversification of the economy.

 

Once the price of oil begins to move northwards, we go back to our dependency on oil. Right now, we are seeing that same scenario playing out. The price of oil is beginning to climb again and our government appears to have forgotten the diversification of the economy.

But funny enough for Nigeria, the breakeven point for us is  usually not even from the price of oil but from production. Right now we are producing about 1.5mbpd and that is still way below the 1.8mbpd that was the initial target. In fact, the projection Nigeria had as at 2020, was 2.3mbpd but that is not even happening if we are to go by the MTEF, by 2020, we should be producing 1.8mbdp.

 

But going by OPEC quota, we can’t even begin to climb to that 1.8mbpd until around April of 2022. This means that we are going to have another fiscal crisis because some of the permutations that we have made based on expectations from oil revenue will not come true.

 

What this tells us is that we should actually diversify the economy but the diversification will not happen from the blues. The resources that we will use to diversify the economy have to come from the same oil and gas resources. We have to move money from a dirty economy and put it into a clean economy. One way we can do that is to fund agriculture and infrastructure which will carry the rest of the economy.

 

So when we put money on agriculture, put money on infrastructure, put money in human development (education, healthcare, water, sanitation and hygiene) and those sectors of the economy that will enable our citizens to live a healthy, fulfilled and dignified life. In that way they can achieve their potential and also contribute their own quota to the growth of the economy.

 

If we are able to do this, we are going to see that the productive capacity of the economy will be triggered and we are going to see a lot of improvements. These things don’t happen automatically. They are supposed to be gradual but they have to be a deliberate plan of action to achieve them.

 

 

The government of the day would tell you it is funding agriculture and expanding infrastructure yet we can’t really see the impact. What are they not doing right?

 

Again, that is part of the challenge. We have a very huge appetite for borrowing and accumulating debts. In Nigeria borrowing has become an addiction for those controlling the government of our country, it is unfortunate because a lot of savings could have been made, a lot of what we are borrowing, we could actually save.

 

Look at the number of MDAs that Nigeria has at the moment and the cost implications.

 

We don’t need many of them. We had a Stephen Oronsaye report that recommended a lot of mergers and scrapping of some agencies. There are a lot of MDAs that are under lock and key 12 month a year, yet they draw a budget from the government purse.

 

The point is not about putting money into agriculture and infrastructure, it is also about implementation of what we set out to do in the budget. We have a lot of budget credibility gap and while we put a lot in the budget for agriculture and infrastructure, how much of these have been implemented.

 

There are several roads that have now been moved to the NNPC to fund which have been repeatedly showing up in our budget for several years. Now, they will be taken up by the NNPC because they have affected the movement of petroleum products across the country.

 

Unfortunately, Nigeria is running a very disturbing kind of federalism where a lot of the responsibilities are placed at the centre. Some of these responsibilities should be moved to the sub-national government which brings us to the constitutional issues of revenue allocation and fiscal federalism.

 

It will be important for the state government to take up more constitutional responsibilities. In that way, the state will become active centres of economic development and we can track down against some specific responsibilities. The way the revenue allocation formula is structured makes the states depend largely on the centre for survival. Right now we have a 13 per cent derivation principle which applies to the oil producing states.

 

Meanwhile, apart from the North, where you have the highest prevalence of poverty, the oil producing communities also have a high rate of poverty. This should tell us that there is a nexus between extraction of fossil fuel and the deepening of poverty.

 

To address that, it will be important for Nigeria to revisit the fiscal allocation formula of the country.

Fortunately, the Revenue Mobilization Allocation and Fiscal Commission has been going round talking about these issues for some time now. We are hoping that they will address some of these issues, especially where it has to do with the percentage that goes to the state government.

 

The States and Local Governments combined need to have a higher allocation than what goes to the centre. Currently, the centre is getting higher than what goes to the states

 

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