Failing to Use the Balance Sheet to Manage Cycle Shocks: Evidence from Nigeria

Abstract

Nigeria entered the 2020 COVID-19–related oil price downturn without the fiscal buffers that numerous resource-rich economies had built over time. Despite heavy dependence on petroleum revenues, the country has made limited use of stabilization tools such as structured hedging programs, sovereign savings mechanisms, or strategic reserves, leaving public finances exposed to external shocks. Drawing on political choice theory and the resource governance literature, this study examines how institutional conditions shaped crisis management during the 2020 oil price collapse and the COVID-19 pandemic. The study combines qualitative institutional analysis with stochastic counterfactual simulations, comparing Nigeria’s policy approach with those of oil-producing countries including Mexico, Saudi Arabia, the United Arab Emirates, Angola, and Ghana, using data from the IMF, World Bank, Afreximbank, and peer-reviewed sources. The analysis identifies institutional gaps in Nigeria’s use of hedging, sovereign savings, and reserve infrastructure. Counterfactual modeling indicates that even a modest oil hedging strategy could have mitigated the 2020 downturn, reducing GDP contraction by an estimated 0.54 percentage points. These findings suggest that governance constraints contributed to fiscal vulnerability. The study proposes a four-pillar framework centered on risk hedging, revenue savings, strategic investment, and institutional reform to strengthen fiscal stability and resilience to external shocks.