Nigeria’s mono economy powered by crude oil is under threat. Consequently, the federal government is taking another look at its 2020 budget. No thanks to coronavirus. FESTUS OKOROMADU writes on the urgent need to resolve the situation.
As the battle for control of the global oil market between Saudi Arabia and Russia intensified, oil prices on Wednesday, again embarked on a backward slide toward the four-year lows hit on Monday. As Brent futures traded near $36 a barrel in London.
This definitely is no good news for Nigeria’s economic managers as they struggle to find solutions to the double crisis of the crude oil market supremacy, between the two global oil producer and the economic twist that coronavirus has brought to the global market place.
And as coronavirus which has been declared as a pandemic by World Health Organization (WHO) continues to take its toll on markets, its threat to the global economy seems very dicey.
Many economists appear to be seeing recession ahead. Unfortunately, as the world has become a global village no one seems to be isolated from the looming economic danger ahead. Not even Nigeria, where reactionary measures are preferred to being proactive.
Perhaps, the persistent slide of crude oil price, the nation’s main source of income as well as the beefs over the control of its market, even at a time when the price value of the commodity is weakened, is getting governments and all concerned thinking.
Against this backdrop, the country’s 2020 budget is facing a waterloo as the benchmark of $57 per barrel of crude oil becomes unrealistic, President Muhammadu Buhari, on Monday set up a budget review committee to salvage the N10.59trillion budget.
The committee chaired by the Minister of Finance, Budget and Planning, Mrs Zainab Ahmed, was handed the primary duty of reviewing the $57 oil benchmark for the budget and ultimately recommend an appropriate size, down from the current N10.59trillion.
Other members are the Minister of State, Petroleum Resources, Mr Timipre Sylva; Governor of the Central Bank of Nigeria, Mr Godwin Emefiele; and the group managing director of the Nigerian National Petroleum Corporation, Mr Mele Kyari.
Addressing state house correspondents, Ahmed said the committee would determine the new benchmark for the budget.
“Our mandate is to make a very quick assessment of the impact of this coronavirus on the economy, especially as it affects the crude oil price.
“It is very clear that we will have to revisit the crude oil benchmark price that we have of $57 per barrel. We have to revisit it and lower the price.
“Where it will be lowered (benchmark) is the subject of this committee. What the impact will be is that there will be reduced revenue to the budget as it will cut the size of the budget.The quantum of the cut is what we are supposed to assess as a committee,” she said.
She admitted that the government was seriously concerned about the impact of coronavirus on the nation’s economy.
Similarly, Sylva who admitted the reported disagreement between the Organisation of Petroleum Exporting Countries (OPEC) and OPEC+ member states, said the matter was not what Nigeria could handle unilaterally, but would be handled at the level of OPEC versus OPEC+ bodies.
But as at mid week, the issue appears to be escalating thereby posing more threat to nations like Nigeria whose economy depends almost solely on the black gold.
The Unfortunate Reality
In what can better be described as the unfortunate reality, the group managing director of the NNPC, Mallam Mele Kyari, while speaking at a round table discussion organised by the CBN in Abuja, on Wednesday said the country’s crude oil was facing more challenges than mere price slide in the international market.
Throwing more light on the situation he said, “Due to the coronavirus pandemic, Nigeria has about 50 cargoes of crude oil that have not found landing,” adding that “this implies that there are no off-takers for them for now due to drop in demand.”
On natural gas export, he said, “Today, I can share with you that there are over 12 stranded LNG cargoes in the market globally. It has never happened before. LNG cargoes that are stranded with no hope of being purchased because there is abrupt collapse in demand associated with the outbreak of coronavirus.”
Views Of Experts
According to a senior research analyst at FXTM, Lukman Otunuga, the staggering depreciation in oil prices could not have come at a more disruptive and critical time for the Nigerian economy.
“At this point in time it is difficult to pinpoint where the floor is on oil which has depreciated over 43 per cent since the start of 2020, and this is bad news for many emerging market energy producers including Nigeria.
“The country’s export earnings and government revenues will take a direct hit from the steep decline in oil prices. This will hit foreign exchange earnings, the Central Bank of Nigeria’s ability to defend the naira, and may even result in rising inflationary pressures,” he said.
Raising questions over Nigeria’s ability to effectively implement the 2020 budget which has set the benchmark for oil at $57 and an oil revenue goal of N2.64 trillion, Otunuga noted that if severely depressed, oil prices would hit export earnings, reduce government revenues, weaken the naira and stoke inflationary pressures, adding that “Nigeria’s economy will be under threat in 2020.”
On his part, head of research at United Capital, Wale Olusi, noted that the oil price crash would mean a fall in the revenue for the country and the country may need to borrow more than the initial plan to be able to execute the budget.
According to him, the crash in oil price “means that oil revenue will drop by 40 per cent and it means we won’t be able to properly execute budget of N10 trillion except we increase borrowing beyond the initial plan because the extra 40 per cent decline has to come from somewhere.
“If we don’t borrow, the budget automatically will not be able to be executed 100 per cent which simply means that some of the capital projects will go unimplemented.
“Most of the time recurrent expenditure will be implemented because people have to get paid their salaries and debt servicing obligations have to be met. Most of the time it is capital projects that get abandoned.”
This view was also shared by the managing director and chief executive of Cowry Assets Management, Johnson Chukwu , who noted that the prognosis was not good for the country. He said the revenue would be severely affected to the extent that “it will be difficult for the government to meet recurrent expenditure talk less of capital expenditure if oil prices remain at the low level.”
He however hoped that the global oil price situation is a short- term situation as he said, “What we are witnessing is a panic drop in crude prices. I believe it will correct itself. It may not go back to $58, but I don’t think it will remain at the current level for a long time.
“Should it remain at current level, our reserves will be depleted sooner than expected, exchange rate will be affected and we may see a devaluation of the currency, and a sharp increase in inflation rate.”
Managing director of Afrinvest Securities Limited, Ayodeji Ebo, who noted that with oil price now below the $50 mark, the trade deficit in the first quarter in 2020, may be higher than what was recorded in the last quarter of last year.
He noted that if there was a continued decline in the price of crude, the reserves would further deplete making it unsustainable for the country to continue to defend its currency. Olusi while noting that oil proceeds account for about 90 per cent of what goes into the reserves, said, “If there is a pressure coming from oil, it means the accretion to the external reserves will be very very slow.
“If the CBN is dipping hand faster into the reserves more than oil is adding into it, it is likely to fall below the psychological level of $30 billion that the CBN has been talking about recently. If it hits that level, then there might be problem with devaluation,” he said.
In his reaction the managing director of Danvic Petroleum International, Dr Afe Mayowa, said that Nigeria should be guided by the obvious fact that crude oil being a global commodity cannot be controlled by any nation.
Some Optimism In The Face Of Challenges
The GMD of NNPC is however hopeful that the Corporation under his management, would put in place strategic measures that would alleviate the cost of crude oil production in the country. He stated that doing so would create market for Nigeria’s crude and make Nigeria a choice destination for Foreign Direct Investment(FDI).
According to him, the current cost of crude oil production in the country was within the range of $15 to $17 per barrel, stressing that some leaders in the Industry such as Saudi Arabia’s cost of production was between $4 and $5 per barrel.
He noted that due to the uncertainties of the global crude oil market, countries that produce at the cheapest price would remain in the market, while jurisdictions with high cost of crude oil production would not be able to cope with the competing prices.
He said that in the face of the coronavirus global pandemic, countries like Saudi Arabia have given discount of $8 and Iraq $5 to their off-takers in some locations meaning that when crude oil sells at $30 per barrel, countries like Saudi Arabia is selling at $22 per barrel and Iraq selling their crude at $25 per barrel.
Although, Mallam Kyari, expressed optimism that the NNPC was working round the clock to increase the country’s daily production to 3 million barrels per day and shore up the crude oil reserves to 40 billion barrels, he failed to explain what the impact of such insignificant amount would be when Saudi Arabia is targeting 13 million barrels per day production and selling at lower than market price.
On his part, the chief executive officer, Economic Associates, Dr Ayo Teriba, has advised the government to leverage its over $50billion equity investment in joint venture oil assets to raise funds.
He said the option should have been explored in 2016, when the country slipped into recession.
He said, “Are we at risk of another recession? Are we at risk of another devaluation? It depends on how long the low oil price regime lasts. This latest one is arising from an oil price war between Saudi Arabia and Russia.”
Director general, Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, described the spread of coronavirus as a major threat to the nation’s economy.
Yusuf said many manufacturers and service providers in the country were already experiencing acute shortage of raw materials and intermediate inputs as a result of the virus outbreak.
Director general, Nigeria Employers Consultative Association, Dr Timothy Olawale, said the fall in the global oil price called for concern.
He said the government must ensure that the country did not fall back into recession.
However one cannot but agree with Mallam Kyari when he called on government at all levels, captains of Industries and the organised private sector(OPS) to brace up for the new low regime of global crude oil prices, adding that realistic estimates must be made to reflect the current realities of the crude oil market.
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