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Amidst the falling price of oil in the international market and its attendant negative impact on the revenue of the Nigeria’s mono-product economy, the fiscal and monetary authorities have reel out measures to tackle the problem which will have adverse effect on the masses
| By Anayo Ezugwu | Dec. 8, 2014 @ 01:00 GMT |
THE signs have been with us for the past two years that Nigeria’s revenue and foreign reserve were dwindling. But time after time, the managers of the nation’s economy through the ministry of finance and Central Bank of Nigeria, CBN, assured Nigerians that all was well. There have been reports that the country was broke; that the foreign reserve was being depleted and that our debt profile was on the increase. But the fiscal and monetary authorities assured Nigerians that the country has enough to sustain three months of importation and that the country’s total debt (both external and domestic) was merely about N10.4 trillion which was commensurate with the rising profile of the economy as having the largest gross domestic product, GDP, in Africa and recorded 6 percent growth.
With the assurance, it appears that the economic managers all went to bed only to wake up badly a fortnight ago to alert the nation that indeed there was trouble and that the economy was in a precarious state because of the falling prices of crude oil in the international market.
Ngozi Okonjo-Iweala, minister of finance and coordinating minister of the economy, took the first shot telling Nigerians about the poor health of the economy on November 16. According to her, the harsh reality of the implications of the current declining price of crude oil made the federal government to adopt a multi-pronged strategic response to mitigate the adverse effects on the country. The measures are to contain the decline in global oil prices, protect growth, reassure investors and keep the economy on a stable course through the crisis which has seen a significant drop in oil revenues for Nigeria and other oil producing countries since June. She said the federal ministry of finance has been keeping a close eye on movements in global oil prices because of the critical importance of oil as the country’s most important source of revenue.
“Given the nature of the oil market, we needed to see the extent and trend of the oil price in order to take the right measures. Panic is not a strategy. It’s important that our strategies are based on facts and a clear understanding of both the strengths of the economy and the challenges posed by the drop in oil prices which is currently at $79 for our premium Bonny Light Crude,” she said.
“The drop in oil prices is a serious challenge which we must confront as a country. We must be prepared to make sacrifices where necessary. But we should also not forget that we retain some important advantages such as a broad economic base driven by the private sector and anchored on sound policies. Our strategy is to continue to strengthen the sectors that drive growth such as agriculture and housing while reducing waste with a renewed focus on prudence,” she said.
Despite the assurances, there has been palpable worry that Nigerians are in for a hard time as the price of oil prices has continued to fall and may reach as low as below $100. Perhaps, in order to calm frayed nerves, Okonjo-Iweala last week stressed again that there was no need for all to panic.
“Panic is not a strategy. We are managing the situation to keep the economy on a stable sustainable course and we will not listen to those who want us to throw up our hands in despair and give up. Our scenario based approach to managing the impact of the oil price drop is proactive and comprehensive. Even if the price drops to 60 dollars we are ready,” Okonjo-Iweala said
According to her, “The common man is a priority in our strategy for the fall in oil price. His interests are a priority. That’s why even in implementing cuts in capital budget for 2015, the areas that are of most benefit to the common man, critical infrastructural projects like the Lagos Ibadan expressway, the second Niger Bridge, rail and power projects etc which will create jobs and enhance the comfort of our people will go on.
“This pro-common man focus can also be seen in the safety nets which is a major priority for the President. The projection is for two to three million families across Nigeria will benefit from a conditional cash transfer scheme to encourage school attendance, improve health and nutrition, reduce infant and maternal mortality etc. That’s why we are also focusing on improving value chain in agric, the number one source of job creation in the country. Anything that affects the poor, the young and vulnerable, we will prioritise it”.
She also said that as part of renewed focus on increasing tax revenues to mitigate the impact of the fall in oil prices, the revenue target for the next three years is three billion dollars. The FIRS working with Mckinsey has already made progress in reaching the target of N75 billion over and above the regular collection target”.
Okonjo-Iweala may be right in the assessment of the situation but the free fall of the Naira which followed on the heels of her statement has frightened the common man. The depreciation of the naira expectedly will spike the prices of goods and services in addition to the capital flights from foreign investors who have already started divesting their stocks in the stock markets and federal government bonds.
In order to bolster confidence on the fate of foreign reserve and the Naira, the Central bank of Nigerian, CBN, without being told last week fixed the exchange rate at N168 to the US dollar. It was formerly N155 to a dollar. Godwin Emefiele, who just concluded the meeting with the Monetary Policy Committee, MPC, said the committee decided to tighten the apex bank’s monetary policy by allowing some flexibility in the exchange rate to stem speculative activities and depletion of reserves. The bank also increased the Monetary Policy Rate, MPR, from 12 percent to 13 percent. By these 100 basis points in MPR, the cost of funds to the banking system from the apex bank has now increased, leading to an increase in lending rate from commercial banks to businesses.
The MPC had considered the fact that the drop in oil price had reduced the accretion to external reserves, thereby constraining the ability of the bank to continually defend the naira and sustain the stability of the exchange rate. “The current situation demands that the bank confronts the issue of declining external reserves head-on in order to strengthen the value of the domestic currency.
Consequently, stabilising prices and maintaining exchange rate stability and charting a sustainable path for medium to long term growth are the immediate top priorities” Emefiele said.
In the committee’s opinion, a more flexible naira in the face of non-existent fiscal buffers was the most viable policy option at a time of heightened demand pressure for foreign exchange and falling oil prices. The committee is of the view that if it failed to take the right policy actions now, the market would force the bank to take more drastic actions in the future with far less foreign exchange reserves. Also, giving the level of excess liquidity in the banking system, it becomes imperative for the bank to address the sources of the foreign exchange demand pressure.
Never mind the rallying actions of both the fiscal and monetary authorities, the picture they have so far is that the Nigerian economy is in bad shape and its implications are obvious to Nigerians and businesses. Economic and financial experts are of the opinion that Nigerians should be ready for a harsh economy in the nearest future as a result of the continued fall in the prices of oil. Reacting to the measures adopted by the federal government, they stated that the decline was only the beginning and that all the sectors of the economy from the real sector, manufacturing to small and medium enterprises would feel the heat sooner or later.
The implication is that the measures the authorities have taken so far would translate to more poverty, reduce production from the real sector, cause inflation, increase the fuel subsidy (or reduce the subsidy if the government can muster the political will) and increase debt for the country.
The austerity measures currently would lead to increase in the cost of production because of the import dependent character of the economy. It is obvious that the sharp declines in exchange rate will naturally push up the operating cost of enterprises in the economy, which many firms are already experiencing across all sectors.
According to the Lagos Chambers of Commerce and Industry, LCCI, the measures will affect government patronage in addition to the risk of payment default by government, contract variation, poor impact on tourism, among others. It pointed out that the prevailing economic conditions call for review of processes and priorities in both the public and private sectors of the economy to ensure sustainability. “There will surely be a dislocation triggered by changes in cost parameters and this would require fresh evaluation of business models of enterprises to remain viable. But in all of these it is necessary not to respond out of panic,” it said.
The LCCI said the way out is diversification of the Nigerian economy to reduce over-dependence on oil as the mainstay of the country’s economy. Remi Bello, president, LCCI, said that the current global oil market developments call for drastic measures to keep the economy on a sustainable path. He noted that the fiscal and monetary policy responses by the government and the Central Bank of Nigeria, CBN, are inevitable in the circumstances.
“An economy that is diversified has a better capacity to withstand shocks. At every turn in our advocacy activities, we have canvassed the need for the creation of an enabling environment to enhance the productivity of enterprises and consequently ensure economic diversification,” he said.
Similarly, Henry Boyo, economic analyst, said the measure would deepen poverty and as a result increase inflation definitely. According to him, the eight percent inflation the country enjoys presently means that every four to five years, 50 percent the country’s income will go to inflation. “Anything that creates higher inflation is destined to make the people poorer particularly the income earners. For industries, you may not be aware of what they are doing, but when they increase the MPR from 12 percent to 13 percent, what it means is that they are equally increasing the cost of funds from 15 and 20 percent for the real sector. With this, how is the industry going to create employment, pay rents and things like that. We should ask ourselves why the managers of the economy and the CBN are deliberately killing the economy by making sure that interest rate continue to be high, making sure that inflation would be high and making sure that the exchange rate of naira to dollar would not be stronger. If you look at the CBN governor’s speech during the announcement of the devaluation of naira, he was lamenting that the excess liquidity was high but refuses to tell Nigerians why the excess liquidity was high,” he said.
However, Bismark Rewane, chief executive, Financial Derivatives Company, said the step by the government was a good start, but wondered if the measures would actually cushion the impact of the falling oil prices. “That is a good start. The most important thing is the fact that the government has come to accept that it has to do something with respect to the falling oil prices. What we are seeing now is not a short-term phenomenon. Whether the therapy is adequate is another issue. But I think it is a good move and it has not ruled out other moves. On the $2bn withdrawal from the ECA, I don’t think that will make any impact. The reality is that we have to look at what is important. And what is important is that the Nigerian government has come to terms with the fact that it has to start austerity. So it is encouraging and this is the beginning of a number of steps to be adopted,” he said.
Supporting Bismark, Samuel Nzekwe, former president, Association of National Accountants of Nigeria, ANAN, said the government’s resolve to adopt austerity measures was not surprising. He said it was a known fact that more than 80 percent of the country’s resources come from oil and so it is not a surprise that the government is adopting austerity measures considering the fact that oil prices are falling. This is actually the beginning of things to come.
“Apart from imposing tax on luxuries, they should look at how to diversify the economy by creating enabling environment so that industries can thrive. Increasing or taxing more utilities is not the major solution. The government should now make more efforts to diversify the economy. They should make concerted efforts to ensure that the agricultural sector and a few others are working. Nigerians may not worry much about the tax issue because it is expected but this tax should be used wisely. It should not end in the pockets of a few individuals because since the country’s earning is mostly from oil, it means a fall in the price of this commodity will deny Nigeria a lot of income to build roads, power plants and many other things that will benefit the ordinary Nigerian,” he said.
However, the decline may also lead to a reduction in allocation to states and local governments from N3.969 trillion in the 2014 budget to N3.937 trillion in 2015. The proposal, which is contained in the revised 2015-2017 Medium Term Expenditure Framework sent by President Goodluck Jonathan to the National Assembly, is N31.91 billion lower than the amount approved in the 2014 fiscal period.
The sources of allocation, according to the document, are from the federation account, Value Added Tax, VAT, and stabilisation fund (Excess Crude Account). President Jonathan had on November 19, submitted the revised MTEF to the National Assembly, in response to the declining oil price at the international market. He had said the recent development in the international oil market necessitated that the MTEF be revised to allow for adjustment in some of its key parameters.
The MTEF document stated that while the sum of N2.24 trillion should be allocated to states, the 774 local governments should share the sum of N1.697 trillion. The 2015 figure of N2.24trillion for the 36 states is N17 billion lower than N2.257 trillion shared in 2014. Similarly that of local governments is also expected to decline by about N15 billion from N1.711 trillion to N1.697 trillion.
Giving a breakdown of the 2015 allocation to the 36 states, the document put their share of federation account, VAT pool and stabilisation fund at N1.728 trillion, N420.44 billion and N91.55 billion, respectively. This is against the N1.665 trillion, N405.82 billion, and N185.94 billion allocated under the same sub-heads in the current fiscal period. For the 2015 allocation to local governments, the MTEF put their share of the federation account, VAT pool and stabilisation fund at N1.332 trillion, N294.31bn and N70.58 billion, respectively. The amount approved for the 774 local governments in 2014 under these fiscal items were N1.284 trillion, N284.07 billion and N143.35 billion.
Apart from these, it is obvious that the current situation will not end soon because of the impact of drop in oil prices and increased production of shale oil and gas in the United States of America. The fall of oil prices have political under-turn. There are indications that US is conniving with United Arab Emirates, Saudi Arabia and European Unions, EU to force Russia out of business because of its bombardment of Ukraine. There are also indications that the oil prices would continue to fall next year, with the fact that US and Iran have reached a deal to supply more crude oil into the market to further crash the prices of oil.
This scenario is clearly detrimental to the economic growth of oil and gas dependent African countries like Nigeria if not well managed. Oil and gas experts believe that further demand for conventional oil will be driven by Asia countries. According to the International Energy Agency, the energy consumption by Asia including China will grow by more than 100 percent over the next 15 to 20 years. Evaluating this against the backdrop of reports of declining production in many existing oil and gas fields in the North Sea and Gulf of Mexico, it is expected that the price of oil will increase over the projected time window of 20 to 25 years.
But what Nigeria will do with their hydrocarbon resources over these periods will determine its future economic stability.
Experts blamed the federal government of not taking precautionary measures before the fall of oil prices. Joe Ezigbo, managing director, Falcon Corporation Limited, said the federal government was aware of the impending fall of oil price but decides to take no decision till it happened. “We knew it will happen. If anybody tells you that Nigeria didn’t know it will happen that person is wrong. We knew it’s going to happen but the point is, are we prepared for it to happen. The answer is no. But again the way Nigeria is structured at the moment, we keep hoping for the best without facing the reality.
“Today it’s going to hurt us very badly because we are not ready for it. And what that means is that the available money for government to spend is no longer there and it will impact on our economy, Nigerians and everything. What that means in essence is that it will teach us a lesson to tighten our belt when we need to. All the subsidies we are talking about, this is the time to actually remove those subsidies for things to change,” he said.
According to Ezigbo, the revolution of shale oil and gas is causing the drop in oil prices. He said the revolution means that countries that used to buy Nigeria oil will now switch to shale oil. “What that means in effect is that US that used to buy more than 50 percent of our oil now have theirs and we have floating oil because more than 50 percent that US used to buy from us is there without new buyers. We need to look for the buyers. I remember also that other countries for political reasons, would like to buy from US. And what that means is that we are losing the percentage of oil US used to buy from us and the percentage other countries that will go for shale oil would buy from us. This will worsen our situation.”
On his part, Moritz Abazie, managing director, Strides Energy and Maritime Limited, said the imminent attainment of energy security by the US particularly through exploitation of shale oil and gas should not surprise anybody. He said energy security has been the goal of every US federal administration for the past three to four decades.
“The global oil and gas system is undergoing dramatic changes as a result of the development of shale gas by US and China. Beyond these two countries, there have been discoveries of oil and gas in one form or the other in some non-traditional oil and gas countries. Nigeria also has shale gas that is yet to be explored. The delay in the passage of the PIB, lack of investment in critical segments of the industry by government and the rising incidence of oil theft and vandalism of key infrastructures as the bane of this growth,” he said.
The recent surge of shale oil and gas production has shown that the quantity of oil Nigeria export has reduced drastically. According to the US Department of Energy, Nigeria did not export a single barrel of crude to US-based refiners in July this year for the first time since records start in 1973. Preliminary data suggest the trend continued in August and September. Many oil producers have seen their exports to the US drop. At its peak in February 2006, the US imported 1.3m barrel per day from Nigeria. By 2012, Nigeria was already selling just 0.5m b/d, but was still one of the top five suppliers to the US, alongside Saudi Arabia, Canada, Mexico and Venezuela. Earlier this year, sales dropped to a trickle of about 100,000 b/d. And in July, they completely stopped importing oil from Nigeria.
The shale revolution has affected US oil suppliers unevenly, hitting particularly hard those in Africa such as Nigeria, Algeria, Libya and Angola, which produce high quality crude. Middle East producers such as Saudi Arabia and Kuwait have suffered far less as they pump crude oil of a lower quality that US refiners continue to buy. Saudi crude oil exports to US have increased over the last one year. Kuwait has also sold more crude to the US so far this year than in 2013. Overall US crude oil imports hit a peak of 10.8m b/d in July 2005. Since then, they have fallen by roughly a third to hit 7.6m b/d in July as domestic production boomed.
Information from the US energy administration has revealed that there are global reserves of about 345 billion barrels of technically recoverable shale oil in 41 countries, and some 7, 299 trillion cubic feet of shale gas. Russia holds 75 billion barrels of this new source of oil, edging the US and China. The discovery of vast quantities of shale oil deposits around the world would increase total world oil resources by about 11 percent and boost gas resources by 47 percent. This development, besides making the US self-sufficient in energy in the coming years could depress global demand for crude, a situation that portends potential adverse impact on Nigeria’s export earnings from crude exports.
Only time will tell if Nigeria will survive the current paradigm shift occasioned by Shale oil and its impact on the fall of prices of oil which is having an adverse effect on the Nation’s mono-product economic revenue base.
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