To say what Nigeria fears most is happening, may be an apt description of the effect of the current downturn in the slide of global crude oil price. It has put everyone on edge – the government and the citizenry. However, operators believe it is an opportunity for economic turnaround, Group Business Editor, SIMEON EBULU reports.
IT was about a month ago, at the International Monetary Fund (IMF)/World Bank Conference in Washington DC, United States (U.S.), that the effect of the slide in oil prices on the global economy first came into the fore. The International Bank for Reconstruction and Development (IBRD), an agency of the World Bank, foreseeing the negative impact of the global slide in crude prices on oil dependent countries, called for proactive actions to be taken to avoid any untoward effect, or at least mitigate it, especially on countries that are heavily dependent on oil.
The Minister of Finance and the Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, who was present at the meeting – herself being a one-time Managing Director of the World Bank – admitted that the falling oil prices would impact negatively on the nation’s economy. She nevertheless sounded confident that measures were already being adopted to cushion the anticipated effects.
Dr. Okonjo-Iweala said in line with the IMF/World Bank prompting, Nigeria would strengthened the existing measures already in place, one of which was to build up the buffers, by increasing savings on the Excess Crude Account (ECA) as well as embarking on other budgetary savings to ensure that the country did not resort to excessive borrowings in the course of implementing the national budget.
Several weeks after Mrs. Okonjo-Iweala spoke in such reassuring tone, in the expectation that the slide in crude prices would abate, the trend is continuing on the same trajectory. The fall, as it were, has come so close to the budgetary oil crude benchmark of $78 for the 2015 national budget, prompting its downward review.
As the minister argued in her statement two days ago, “as part of the response, the Medium Term Expenditure Framework (MTEF) and the 2015 Budget proposal to the National Assembly have been revised. As a result, the Federal Government will be proposing a benchmark of $73 per barrel to the National Assembly compared to the earlier proposed benchmark of $78”.
For a country like Nigeria that relies largely on oil (over 85 per cent) as its major source of revenue, the effects of the falling oil price, if it lingers, will be punitive and widespread. The government’s measured response, encapsulated in the minister’s presentation, have said that much. And it should elicit concern, on the one hand, and on the other hand, serve as a wake-up call for the nation to seriously refocus its action in favour of calls for the diversification of the economy.
This shift is even more urgent now, as Mrs. Okonjo-Iweala has already admitted, given the complexity and the international geo-politics surrounding the oil industry.
Her words: “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.” She could not have put it any better, or more seriously.
Nonetheless, this is the time to draw the line between being serious and taking action, and not dwell on sophistry. The economy, even at the best of times, has been tottering. It is a matter of conjecture what the future holds for Nigeria.
One obvious effect of this development would be the shortfall of money available to the states and local governments when they meet to share the monthly federal allocations. There will be issues when there won’t be money from the Excess Crude Account to augment expected shortfalls from the federal allocations.
It is also envisaged that payment of salaries at the other tiers of government may be affected since they depend mainly on federal allocations.
Also, the nation’s external reserves may experience some downturn since its build-up may stagnate from dwindling revenues.
Be that as it may, the minister has assured of a rebound in the economy, if the country capitalise on other advantages, inherent in the economy.
“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 stressed
She explained that even though the government had been working hard on several scenarios and contingency plans in readiness for any eventuality, it was important to proceed in a measured manner based on a complete understanding of the challenges. She added that given the nature of the oil market, Nigeria need to see the extent and trend of the oil price to take the right measures.
Serious as the situation demands, Mrs. Okonjo-Iweala cautioned against taking panicky measures in addressing the challenge. “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.
Beyond government’s disposition, the development is of concern to many. The President of Nigerian Association of Petroleum Explorationists (NAPE), Mrs. Adedoja Ojelabi, expressed worry over the continued drop in price of crude oil because of the anticipated negative impact it will have on the economy.
Mrs. Ojelabi said the falling oil price shouldn’t have been a concern, if necessary precautions were put in place. She said in any normal market, prices are expected to rise and fall. But she added that as a country, Nigeria doesn’t anticipate issues that would drive up or drive down the price and the measures to mitigate situations such as the sliding crude oil price.
She added that although “Nigeria does not have control over oil price because it is internationally determined through the forces of demand and supply, but it can mitigate the effect locally by producing and refining sufficiently in-country”.
“If we have this self-sufficiency, the effect will trickle down to other sectors of the economy and the impact of falling price will not be felt so much. If Nigeria produces and refines more than it requires locally, in a period of continued drop in prices as it is now, it can export refined products. Also, if proceeds from oil have been sufficiently invested in expanding other sectors and making power available to Nigerians, the benefits should be unquantifiable”, she said.
She argued that the effect of the falling oil price is worsened by the fact that Nigeria had not been meeting its production target for a long time, stating that the nation’s reserve was showing a sign of decline as exploration drilling has hit the lowest level ever experienced in the nation’s history. The falling price, Mrs. Ojelabi said, would worsen the situation as low oil price discourages exploration.
NAPE President-elect, Chinwendu Edozien, explained that the drop in oil price was the result of consumer countries, such as the U.S. becoming self-sufficient in domestic production and supply. He added that it was the price of crude that determines whether an oil firm would go and drill or not.
“The search for oil is often driven by price of crude. So, if oil price is so low, oil firms will not go searching for oil because they will end up operating at a loss,” the NAPE President-elect said.
The Chief Executive Officer, International Energy Services Limited, Dr. Diran Fawibe, stated that the S73 benchmark for a barrel was not appropriate, considering the current price. He noted that $70 could have been more appropriate. On the effect of falling oil price on exploration, he argued that at $70 per a barrel, oil firms can still search for oil and carry out other operations.
“Even at less than $70, oil firms can carry exploration activities, but on certain conditions, such as passage of the Petroleum Industry Bill and putting necessary incentives and environment in place”, he added.
The Managing Director, Niger Delta Exploration & Production Limited, Dr. Layi Fatona, stated: “I guess the falling oil price is good for Nigeria. It’s an opportunity to think less of oil production for export only. Now, it’s the time to think extra value addition existing between production and the terminal. The diversity of income earnings the country misses by only export of crude oil must guide our strategy for dealing with the shocks of low oil price.”
To the Managing Director, Afrinvest West Africa Plc, Ike Chioke, oil prices have typically been a crucial indicator of economic cycles. He said higher oil prices have been associated with periods of boom in the global economy due to related expansion in economic activities, while the sporadic decline in oil prices, highlights the likelihood of a bear market.
He anticipated a dynamic reversal of these phenomena, primarily as the U.S. oil production continues to expand while the global economy expands simultaneously.
“The oil industry ‘Titans’ may be required to be defensive, crossing the lower band of Shale’s viable cost price to ensure the rules of the game are not altered by new comers in the industry,” he said in an emailed report.
Chioke noted the proposed 2015 budget is based on a benchmark oil price of $78bp and as such, is susceptible to progressive decline in crude oil prices.
He said Nigeria’s revenue profile is comprised of 75 per cent crude oil receipts, while 95 per cent of foreign exchange earnings are obtained from crude oil exports, culminating into a negative accretion rate in the external reserve.
“The decline in oil prices highlights one key question: will fiscal authorities have the capacity to stabilise the economy in the case of an adverse effect? In a flight to safety and to avoid the anticipated devaluation of the local currency, foreign investors have begun to exit position, leading to a plunge in the capital market,” he said.
The firm’s managing director said the naira had witnessed enormous pressure within the last three months with a 4.7 per cent depreciation during the period. In consolation, he noted that the external reserves cover over six months of imports – above the three month International Monetary Fund threshold.
According to him, while the diversification process of fiscal revenues gradually gains momentum, the Nigerian economy continues to rely overwhelmingly on crude oil receipt for foreign exchange earnings.
The current reduction in the price of crude oil would have a dire consequence for the economy, the President of the Lagos Chamber of Commerce and Industry (LCCI), Alhaji Remi Bello, equally said.
He said not only will the excess crude account be drastically reduced, but that it would result in what he described as Cost-Push-Inflation, and indirectly devalue the currency from its exchange rate.
He said: “ There will be inflation, as limited dollars will be available to those who need it. For instance, the dollar can go up in the parallel market to about N190 from its N160 position currently”.
Bello stressed that this might push up the cost of operation for the manufacturing sector specifically and a change in the Monetary Policy Rate (MPR).
In addition, he said jobs would be drastically affected, stressing that any reduction in government spending would affect the economy as government’s spending acts as a stimulus to the whole economy.
The only discordant tune to the development came from the Nigeria Customs Service. The National Publicity Officer, Wale Adeniyi, said the reduction in the oil price benchmark by the Federal Government would have no effect on Customs revenue, arguing that the “Customs does not collect duty on oil”.
Some respondents in a Radio programme monitored by The Nation said there were some unseen benefits in the downward slide in crude oil price. They argued that it was only when petroleum price was unattractive that the Federal Government and policy makers would think constructively to diversify the economy.
They regretted the nation’s dependency on oil and the monolithic economy being operated, insisting that no serious nation would run its economy on a mono-economy.
While they asked for the complete removal of the fuel subsidy, they also argued that the price reduction would curb corruption in the oil sector, which has become a virus in the economy.
