What it means
Nigeria earns a large share of its government income from selling crude oil, and oil prices swing widely from year to year. If a government spends every dollar it receives, it will have to cut services or borrow when prices drop.
The Excess Crude Account, created in the early 2000s, was designed to avoid that boom and bust pattern. Each annual budget is built on an assumed benchmark price for a barrel of oil.
If the actual price is higher than the benchmark, the extra revenue is paid into the account rather than being spent straight away. If the price falls below the benchmark, the government can in theory draw on the savings to fill the gap.
The arrangement is closely tied to how revenue is shared. In Nigeria, oil income is distributed among the federal government, states and local governments, so the question of who benefits from the savings and when they can be withdrawn has been politically sensitive.
Governors and federal officials have often disagreed over withdrawals and over how much should be shared out. The account has also been criticised for a lack of transparency.
Balances have changed sharply as money was drawn down, and observers have asked for clearer rules on deposits and withdrawals. Over time, the country has also set up other funds for related purposes, such as a sovereign investment authority.
For analysts and investors, the balance in a savings account like this is a sign of a government's buffer against shocks. A larger cushion can support the currency and reduce the risk of sudden spending cuts.
A depleted account can signal vulnerability if oil prices fall.
In practice
Real-world examples.
Example
A government in an oil-exporting country sets its budget at a benchmark of $55 a barrel. The market price averages $75 for the year. The finance ministry pays the surplus into a stabilisation account instead of increasing public wages.
Example
A bank economist reviews a country's reserves and notes that the savings account has been drained to cover an earlier price crash. She lowers her forecast for the country's ability to defend its currency. Her note advises clients to be cautious about the country's bonds.
Example
A state government in an oil-producing federation argues that part of the savings should be released to fund road projects. The federal finance ministry says the money is needed as a buffer for the next downturn. The dispute goes to a committee that reviews the proposed distribution.
Formula
Calculation
Excess revenue = (Actual oil price - Benchmark price) x Barrels sold
Suppose a government budgets on a benchmark price of $60 a barrel and expects to sell 100 million barrels in the year. The actual average price turns out to be $80 a barrel.
Excess revenue = ($80 - $60) x 100,000,000 = $20 x 100,000,000 = $2,000,000,000.
The $2 billion above the budget assumption would be paid into the savings account. If the price had instead averaged $50, the shortfall would be ($60 - $50) x 100,000,000 = $1,000,000,000, which the government could in principle cover from the account.Case study
Seen in the real world.
Rivermouth is a fictional oil-exporting nation that decided to copy the idea of a savings account for windfall oil revenue. Its budget assumed $65 a barrel, and for three years the market price stayed well above that level.
The finance minister insisted that every dollar above the benchmark be saved, even though regional leaders wanted the money spent on infrastructure. Over the period, the account reached $9 billion.
In this illustrative case, oil prices then collapsed by 40%, and the government was able to draw from the account to keep paying civil servants and finishing key projects. The central bank also used the stronger reserves to calm currency markets. Critics still argued that some of the money should have been invested for long-term returns.
Watch out
Common mistakes.
- Thinking the account is a bank account that earns large returns, when it was mainly a holding mechanism for surplus revenue.
- Assuming that a savings account guarantees fiscal discipline, when governments can still withdraw funds for other priorities.
- Confusing it with a sovereign wealth fund, which usually invests for the long term while this type of account was set up mainly for stabilisation.
Questions
People also ask.
Why is a benchmark price used?
It gives the government a conservative planning assumption, so that unexpected extra income is saved rather than spent on commitments that cannot be sustained.
Who controls withdrawals?
This has varied and has been a point of political debate, because federal, state and local governments each claim a share of oil income.
Do other countries have similar arrangements?
Yes. Many commodity exporters use stabilisation funds or savings accounts to manage the swings in export revenue.
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