Intrigue surrounds oil windfalls

Financial Times

20 January 2011

Intrigue surrounds oil windfalls

The way Nigeria manages windfall revenues when oil prices soar has been a continuous source of friction and intrigue since the days of military rule.

The excess crude account (ECA), which has surfaced as an issue for investors as Nigeria makes its debut on international bond markets, was one of the more controversial financial innovations of the elected government of Olusegun Obasanjo, who stood down in 2007.

The fund, into which surpluses from crude exports above the budgeted price of oil are supposed to accumulate, was set up two years earlier to reduce Nigeria’s historical vulnerability to swings in the world oil price, on which the country depends typically for more than 80 per cent of earnings. At the time, the government was setting about clearing its $33bn external debt, marking a transformation from financial basket case to budding frontier market.

But the special account stirred political tensions because legally under the federal constitution the revenues should be split between the federal, state and local governments. Mr Obasanjo, a stubborn former general, found ways to contain pressure to disburse the money, and the account began to fill up as oil prices soared.