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Nigeria

Nigeria: Fall in Excess Crude Account highlights vulnerability to shocks

  • Nigeria’s Excess Crude Account (ECA) balance fell to US$72mn on 19 February

  • The ECA was established to save excess oil revenues

  • The drop signals revenue pressures; economy significantly at risk to exogenous shocks if oil prices fall

Nigeria: Fall in Excess Crude Account highlights vulnerability to shocks
Ayodeji Dawodu
Ayodeji Dawodu

Equity Research Analyst, Industrials

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Tellimer Research
21 February 2020
Published byTellimer Research

Nigeria’s Excess Crude Account (ECA) balance fell to US$72mn on 19 February 2020, down from US$325mn on 16 January 2020, according to the disclosure by the Federal Account Allocation Committee. The ECA balance was US$500mn in January 2019 and US$20bn in January 2009. 

The ECA was established in 2004 by former President Olusegun Obasanjo to save excess oil revenues above the benchmark in the annual budget, with the overriding objective of 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.

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. Furthermore, 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.

Between 2009-2014, despite Brent oil prices averaging US$95.6/bbl versus an average benchmark budget oil price of US$55.6/bbl, Nigeria's ECA balance fell to US$2.45bn at the end of December 2014, as excess revenues were used for fuel subsidy payments, debt financing, power projects, security and distributed among the three tiers of the government (to augment revenue shortfalls).