Our chart today shows one of the symptoms of the Dutch disease. Official reserves rose by just US$5bn to US$40bn between January 2012 and August 2014, in which period the average monthly price of Bonny Light never fell below US$100/b and averaged US$112/b. August 2014 marked the start of the latest oil price slide, and reserves have since declined by US$15bn to US$25bn at end-November. Since Nigeria is essentially a mono-export economy, reserves would normally fall in tandem with the oil price. The earlier movement is not so easily explained.
If the authorities had accumulated a sizeable external buffer in the earlier period, like Algeria for example, the economy would not have been so brutally exposed to the oil price slide.
There is a federal political dimension to this failing. In 2011 the National Assembly approved the replacement of the excess crude account with a ring-fenced, sovereign wealth fund. Such a fund has been created. However, the set monthly transfers to it on those occasions the oil revenues exceed the budget have not materialized because of the opposition of state governors.
The failing can also be explained by the sabotage of oil production facilities in the Niger Delta and by imperfections in governance.
Sources: CBN: NNPC; FBNQuest Research
We can point to a possible change in this story for the better. Gross official reserves increased by US$800m in November, US$1.0bn in December and US$1.5bn month-to-date in January. November’s rise can be explained by a large multilateral loan disbursement. In the absence of other explanations, the subsequent increase could be the result of better management of oil revenues (and the OPEC accord in Vienna).
