Oil & Gas
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Nigeria has engaged McKinsey, a global consulting firm to help broaden the revenue base for the country as the price of crude oil drops
| By Anayo Ezugwu | Nov. 10, 2014 @ 01:00 GMT |
THE fall in the price of global crude oil is affecting the economic outlook of the country. The federal government raised an alarm over the decline in the price of global crude oil. Ngozi Okonjo-Iweala, minister of finance and coordinating minister for the economy, said for Nigeria to sustain stability of its economy, it has to raise its excess crude account, which currently stands at $4.1 billion to $5 billion.
Okonjo-Iweala, who appeared before the Senate committees on Finance and National Planning, during consideration of the 2015-2017 Medium Term Expenditure Framework, MTEF, as a working document for the 2015 budget, also dismissed claims that the country was financially bankrupt in spite of some cash fluctuations it was experiencing. “Nigeria as a country has quite enough assets and I think anybody will agree to that. That is why when people say the country is broke, I say ‘absolutely not’ because if we wanted to mobilise any of our assets to cover, we could do that. Of course, it could take a little bit of time. However, that does not mean that we cannot have some cash flow fluctuations, we just have to manage it because we have an economy that is reasonably self sufficient. We are able to manage ourselves well while everybody is willing to do a few things and we should be able to get there,” she said.
On Sunday, October 26, Ngozi Okonjo-Iweala, minister of finance, told the Financial Times, that if the crude oil prices fall below $78, the country would have to draw down on the Excess Crude Account, ECA, to survive. She said the country has two to three months of rainy day savings to cushion it while contingencies are to be put in place should the world oil prices continue to fall. “Our intention is not to run in there and raid it, but even if prices continue to go down we can survive sufficiently for two to three months. That is the time needed to get other measures in place. What you don’t want is a hard landing. “Our buffers are slimmer this time. There is about $4 billion in the ECA at present, $2 billion short of what the International Monetary Fund had recommended,” she said.
According to Okonjo-Iweala, the country needs to ramp up the non oil revenues on the fiscal side, adding that global consulting firm, McKinsey, has been engaged to carry out an extensive review of revenue services to identify potential gains. She added that she was encouraged by an exhaustive data review, which saw Nigeria’s economy overtake South Africa’s as the continent’s largest, showing that the economy had diversified to a much greater extent than previously thought. “In an oil country you can never feel at ease exactly. But I feel we can master this situation because we have a diverse base. We will have to look very hard at recurrent expenditure, and identify overlapping agencies. When the price is heading down everyone sees the necessity but that doesn’t stop them hating you.”
Okonjo-Iweala agreed, however, that lower oil prices would provide a stronger incentive to government to rein in oil theft, which has cost billions of dollars yearly, and help to drive through stalled oil sector legislation to stimulate production. “That would enable us to pick up quantity to help us cushion on the price side,” she said.
Basir Yuguda, minister of state for finance, said on Wednesday, October 22, after the meeting of the Federation Account Allocation Committee, FAAC, that mineral revenue for the month of September also declined to N374.74 billion compared to N441.91 billion in August. Revenue from value added tax, VAT, also dropped to N61.51 billion compared to NN65.10 billion in the previous month.
He said the slide in the price of crude oil as well as production losses occasioned by shut-ins and the shut-down of trunk lines at various oil terminals resulted in a N99.55 billion drop in Nigeria’s September revenue to N502.09 billion from the N601.64 billion generated in the previous month. Non-mineral revenue also dropped to N127.35 billion compared to N159.73 billion in August partly because some blue chip companies had made payments and returns in September.
The federal government, which depends on oil typically for about 80 percent of revenues, is assuming an oil price of $78 per barrel for its 2015 budget, up from $77.5 per barrel in 2013. Nigeria was in a much stronger position last time the world price of oil tumbled, with about $22 billion squirreled away in the ECA. Those funds helped the country weather the 2008 global financial crisis with economic output relatively unscathed.
But during recent boom years the government has persistently used the ECA, dividing out the proceeds among the 36 states in the federation, which are constitutionally entitled to their share. Nigeria also holds foreign reserves equivalent to $39 billion. These have come under recent pressure as the central bank has stepped in to prop up the naira, but still cover nine months worth of imports.
Nigeria’s ratio of non-oil tax revenues to GDP, at 4.5 percent, is among the lowest on the continent. McKinsey helped South Africa broaden its tax base to the tune of about $3 billion and Okonjo-Iweala believed similar gains were possible over the longer term in Nigeria.
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