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Oil Price Collapse Could Strain Nigeria’s Federal System


(Bloomberg) — The collapse in international oil prices, having dealt a devastating blow to Nigeria’s finances, now threatens the West African nation’s shaky federal political system.

Earnings from crude sales will plunge 80% to 1.1 trillion naira ($2.84 billion) this year, the nation’s budget office said last month. A protracted loss of income could leave most of Nigeria’s 36 states unable to function. It would also aggravate long-simmering tensions in the oil-rich Niger River delta for local control of natural resources.

“Apart from one or two, none of the current 36 states can survive a prolonged loss of oil revenue,” said Clement Nwankwo, executive director of the Abuja-based Policy and Legal Advocacy Centre. “For them, that means an existential crisis. That will throw up a lot of questions, including whether the current federal structure is viable.”

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The federal government of Africa’s biggest oil producer h canas been doling out money to its states for the past half century.

The revenue-sharing formula allocates 53% of available federal revenue to the national government, 27% to the states and 20% to local administrations every month. Lagos, which includes the commercial capital, and Rivers, which encompasses the oil hub of Port Harcourt, are the only two states that generate significant revenue, with the rest reliant on their cash injections to survive.

Besides having to pay wages and fund workers’ pensions, most states face hefty interest bills: data from the Debt Management Office shows they have $17.2 billion of debt. About $4.6 billion was borrowed externally, while the remainder is from domestic bond sales and loans from banks.

“As allocations shrink, and perhaps even disappear temporarily, some states could become insolvent,” Matthew Page, an associate fellow at London-based Chatham House, said in a May 12 report. “The country’s sprawling constellation of federal and state ministries, departments and agencies may shrink out of financial necessity, rather than deliberate reform.”

The oil market collapsed in March in tandem with the spread of the coronavirus, spurring Nigeria’s government to warn that revenue could slump by more than half. While prices have partially rebounded, the states coul face a financial crunch around mid-year because the fuel is usually sold about three months in advance.

President Muhammadu Buhari’s administration has focused on shoring up the budget with increased borrowing, including a $3.4 billion International Monetary Fund loan. It’s thus far shied away from considering a reconfiguration of the states or changing their funding model.

Military Legacy

Nigeria had three regional governments — in the north, southwest and southeast — when it secured independence from Britain in 1960. The regions were semi-autonomous, controlling all resources in their areas and paying 50% tax to the central government.

In 1966, the military seized control of the country in the first of a succession of coups. The southeast moved to secede as Biafra the followings year and the central government broke up the regions into a dozen smaller states in a bid to thwart the breakaway, which sparked a 30-month civil war. Subsequent military rulers created additional states, with the current number of 36 reached in 1996.

The military bequeathed a presidential system to Nigeria that was modeled on that of the U.S., but the states were given very limited autonomy. Its critics see many of the states as nodes for dispensing oil revenue and a drain on public coffers.

Competition for state resources has also stoked destructive political rivalry. Militants operating in the southern oil-rich delta and a new secessionist movement in the southeast is attracting new followers in communities aggrieved at not getting a fair share. Resentment is rife in the predominantly Christian south, where many believe the current system favors the mainly Muslim north.

Rising tensions over the deteriorating state of Nigeria’s finances may give Buhari little choice but to institute administrative reform, while states will need to become more creative when it comes to generating revenue to remain viable, according to Nwankwo.

“The government had resisted conversation around what is called true federalism,” he said. “This time I see it likely to engage on the issue.”

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