The dire consequences of crude oil prices free-fall are looming large on Nigeria, as Brent crude continues its slide from a peak of $112.42 per barrel June 1, to its current level below $68.13 per barrel on Tuesday.
Some analysts say oil prices have come under intense pressure from oversupply of global oil; weak economic growth in developing economies; improvements in alternative shale gas technology, as the U.S. intensifies effort to achieve oil independence and recent global political tensions around major oil producing regions.
The final chance to moderate supply through Organisation of Petroleum Exporting Countries, OPEC, by cutting production quotas, was missed last week, as the group resolved to keep output at its 30million barrels per day.
For Nigeria, the reality of the crisis is that we cannot escape the repercussions of wasting years of boom in the era of high oil prices. Since 1973, Nigeria has experienced six circles oil booms, including 1981, 1990, 2002, 2008 and 2011. The country has been left in shock for these years of wastage without accurate explanation of how the oil booms were managed.
Amid another boom, Nigeria’s external reserves stood at about $62.07billion as at September 2008. One wonders why the country was scraping to manage $37billion at a time when oil prices hovered above $100 per barrel for 41 consecutive months.
Today, the excess crude account has come under intense pressures from another round of distribution with its current balance at about $4.11billion.
At the last Federation Accounts Allocation Committee, FAAC, meeting in November, the states had submitted request for another $2billion from the account to offset debts to contractors for ongoing projects.
The Central Bank of Nigeria, CBN, Monetary Policy Committee, MPC, document for October 2011 expressed concern about the genuineness of the country’s huge appetite for petroleum imports.
In 2014 alone, oil marketers have spent over $7 billion of foreign exchange on importation of petroleum products, resulting in the depletion of the country’s external reserves. The Committee said the demand may have been fuelled by rent-seeking and subsidies.
By consciously refusing to tackle the scourge of crude oil theft, reform the state oil company, NNPC, by passing the Petroleum Industry Bill, PIB, and allowing theft of fuel subsidy to flourish, Nigeria has found itself in an open goal situation with no players in her defence.
Other countries that understand the volatility of oil and the need to invest revenues from the wasting asset have built a cushion in Sovereign Wealth Fund, SWF. However, Nigeria has managed to build a similar fund with a balance of $1.55billion, considered grossly inadequate, compared to Angola ($5billion), Algeria ($77billion), Saudi Arabia ($763billion), and Qatar ($1trillion).
Implications for the Budget
The CBN governor, Godwin Emefiele, said at the end of the MPC meeting on November 25, that setting oil price benchmark at $73 per barrel was grossly optimistic.
The oil price benchmark and oil production target is what governments at all levels use in determining how much revenue would be shared.
When oil price nose-dived in the wake of global financial meltdown, Nigeria’s “conservative” $45 per barrel oil benchmark of 2009 had resulted in a lesson that is still being reviewed and debated..
Some believe falling revenues from crude oil exports should help out the devaluation of the naira from N155 to N168 to the dollar. Technically, the government should now earn N16,800 on every $100 receipt from crude oil exports, instead of N15,500 under the old order.
But, history, has, however, proved otherwise. Gross revenue of the Federation dropped by 38.5% from N7.87trillion in 2008 to N4.84trillion in 2009 despite the CBN devaluing the exchange rate from N117.98 to the dollar (January 2008) to N150.85 to the dollar (November 2009). Worst still, Nigeria’s external reserve was at its peak of $62.08billion in September 2008. Today, it has declined by 5.4 per cent to $36.763billion on December 1, compared to the $38.763 billion in November.
The effect in terms of inflation in service and goods used by the government and the tail wind would take recurrent expenditure to another high. History again tells us the Federal Government recurrent expenditure bill increased from N2.12trillion in 2009 to N3.10trillion in 2010, N3.rillio in 2011, N3.32trillion in 2012 and N3.68trillion in 2013.
The impact of the devaluation of the currency and the intensity of growth in recurrent expenditure (payment of salaries, allowances, payment of debt servicing, compulsory payment to government agencies (National Assembly, Judiciary and the Independent National Electoral Commission (INEC) and running costs of government) is huge.
What is left of the nailed down revenue squeezed out from our diminishing oil and gas reserves? The congenitally deformed Tax system? Or the non-oil revenues? How do we navigate through the tough times? Salaries have to be paid, interest on debts have to be settled, and the machinery of governance must continue to run. Cost? Again History.
The provisional report of the 2013 budget Implementation shows that N3.5trillion was federal government’s total revenue from oil, taxes and other sources, while recurrent expenditure bill was N3.6trillion.
In plain langiage, the federal government spends the entire oil and non-oil revenue running government when oil price was above $100 per barrel. What of capital budget? How have we been funding capital budgets? Borrowing and more borrowing.
Nigeria had an actual deficit of N1.1trillion in 2013, which is 22% of the entire budget. To finance the deficit and fund capital expenditure, a total of N781billion was borrowed from local and international lenders, N223.93billion was borrowed from special accounts (Ecology, Stabilization and Natural Resources Account), and N195billion as federal government share of stabilization accounts.
With the decline in oil prices, federal government would possibly not have N3.6trillion revenue it posted in 2013. Analysts estimate that at $70 per barrel with average exchange rate of N170 to $1, and oil production at 2.23million barrels per day (first quarter figures), federal government’s total share of revenue is estimated at N2.95trillion.
In 2013, federal government compulsory payment to service debt was N828billion, with another expected charge this year, less than N2.12trillion would be left to pay wage bill, pensions, service wide vote, statutory transfers and the rest, which already gulped N2.77trillion in 2013, leaving a gap of N650billion.
Additional deficit that should not be funded with debt. This means Nigeria would have to possibly borrow to run government and pay salaries. The deficit for next year in actual terms would nearly hit N1.8rilliotn (from N1.1trillion in 2013) considering need for capital expenditure and related elections cost.
The key questions remain: If government would truly adopt austerity measures in its conduct of business thereby taking haircuts in its overhead costs, would we increase our oil production output, to reach 2.5 million barrels per day target, which guarantees estimated additional N400billion?
Would statutory institutions, like the National Assembly, cut down its blanket N150billion that has no detail? How much would be left in the special accounts? Would the federal government go ahead and take discriminately from it again? Would we reform NNPC and allow it to be more transparent in receipt of oil revenues to every Nigerian, raising its level of efficiency?
Would federal government rethink how it expands its tax base to raise its share of non-oil revenue which stood at N760billion in 2013? Would we give indiscriminate waivers thereby losing scarce revenues again? Would independent government agencies double their contributions to the Consolidated Revenue Pool?
These are times for tough choices for the federal, state and local governments. It is time for Nigerians to brace up for the challenges ahead and demand utmost efficiency from their leaders as the burden races to trickle down.