Dark days ahead as crude price inches towards Redline …Recession bell tolls

Nigeria’s pride as a leading crude oil producing nation in t.he world is fast fading way in sublime manner with panic button already triggered off in both the country’s seat of power and within the private sector as key economic targets set in the 2020 budget might be phenomenally off the mark by year end. 

While most commentators tend to blame the looming horror on COVID-19 pandemic currently pounding the global economies, those who have followed the trajectory of the country’s economic development from independence believe the government is clearly that architect of its own misfortune with its failure to create a clear roadmap for Nigeria’s economic diversification.

With very little resources coming into government’s coffers even as at the end of the first quarter of the year, the alarm button is on and the Muhammadu Buhari administration is now looking to fall back on past savings and perhaps its crown jewels to augment available options to avert a looming economic collapse.

In March, the Federal Accounts Allocation Committee (FAAC) revenues dropped sharply to N400 billion, with President Muhmmadu Buhari approving the release of $150 million from Nigeria’s Sovereign Wealth Fund to augment an anticipated revenue shortfall in June, leaving the balance at the SWF account at $210 million.

Prior to the COVID-19 outbreak, FAAC shared an average of N700 billion monthly among the three tiers of government, but with this latest crash, experts are predicting that states like Osun may go home with paltry allocation even as they envisage  a further erosion of Nigeria’s external reserves currently standing at $37 billion in addition to astronomic rise in unemployment, delayed development  critical infrastructure among other challenges.

Indeed, there are speculations that the Federal Account Allocation Committee (FAAC) may record its lowest monthly revenue in April (about N200 billion) due the COVID-19 pestilence that has triggered a lockdown of Lagos, Ogun and Abuja for nearly one month running.

. But in the buildup to its strategic effort to defeat the COVID-19 disease and urgently reflate the economy, Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, recently disclosed that Nigeria was seeking to pool over $7.05 billion (N2.679 trillion) in savings and loans, in addition to an undisclosed accruals from the Nigerian Liquefied Natural Gas (NLNG), among others.

The breakdown of the fund shows that $3.4 billion will come from Nigeria’s contributions (savings) to the International Monetary Fund (IMF), while $2.5 billion will be a loan from the World Bank.

In addition, the Buhari administration is looking forward to another $1 billion loan from Africa Development Bank (AfDB) while $150 million would come from the stabilisation fund domiciled with the Nigerian Sovereign Investment Authority (NSIA).

The N2.679 trillion being sourced is different from the N500 billion intervention package sourced locally from special accounts that has already been announced by President Muhammadu Buhari

According economic experts, Nigeria got to this tipping point due to the consistent drop in crude price following the backlash of the coronavirus pandemic that has since shut down the wheels of production across the globe, cutting in its wake the demand for crude oil in various economies. The United States economy is already in crisis despite President Donald Trump’s $2.48trillion stimulus package frontloaded into its to reflate the wheels of production and keep jobs going. As at last week for instance, the US unemployment claims had hit the 26million mark, the highest in over 20 years.

This comes as the Chinese economy regarded as the second largest in the world continues to struggle after overcoming the Wuhan epicenter crisis.

Last week for instance, the US crude, also known as West Texas Intermediate (WTI), slid into the negative territory at $-2 per barrel as oil producers ran out of space to store an unprecedented oversupply of crude left by the coronavirus crisis.

Brent crude, against which Nigeria’s Bonny Light is indexed on, traded at $26.36 and below with the fortunes of the nation’s index crude plummeting to about $12 per barrel, fueling apprehension that the Federal Government’s revenue will further dip.

Energy experts have since argued that Nigeria’s crude challenges are further compounded by insufficient storage capabilities to warehouse unsold supplies, raising concerns that about 32 states, with near-zero capacity to boost their internally generated revenue, could become victims of the pandemic due to their over-reliance on monthly, subvention from the Federal Government.

Furthermore, while states like Lagos, Rivers and a few others with about N40 billion monthly IGR may survive and still pay workers’ salaries, others neck- deep in debt, may have greater challenges as the Federal Government moves to halt further borrowings by them to avoid ballooning Nigeria’s existing N5.27 trillion debt stock.

Earlier, the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr Mele Kyari, had urged Nigerians to brace up for unsavory economic outcomes in the months ahead as he warned the journey may not be rosy even if the coronavirus scourge ends.

He said: “When the oil market collapses, everything collapses. It signifies the importance of the oil market.

Industry experts have blamed the Federal Government’s failure to diversify the Nigerian economy as being responsible for the catastrophic effects the pandemic would have on the country for a long time to come. Today, the situation has become so dire and glaring that tough times are here again and the government appears to have no ready answers to absorb the shocks.

Commenting on these developments, Uche Uwaleke, Professor of Finance and Capital markets at the Nasarawa State University Keffi and former Commissioner for Finance in Imo State, observed that a mono-product economy like Nigeria that depends on oil revenue for over 90 per cent of forex receipts is in grave danger.

He said: “the implications are grave. External reserves are at risk of further depletion with negative impact on the exchange rate and a pass-through effect on inflation and interest rates. “On the fiscal side, the revenue shortfall, even below the revised figure of $30 per barrel, used for the 2020 budget means that many priority projects in this year’s budget will not be executed. The state governments, most of whom depend on federal allocations for payment of salaries, will be the worst- hit. Fiscal deficits will widen for all levels of government increasing the public debt burden. All these have adverse implications for aggregate demand and employment creation- drop in GDP and rise in unemployment rate”.

“The way forward, in my view, is to continue to prioritise spending in favour of critical sectors such as health, education, agriculture and infrastructure especially power. These are strong enablers for economic diversification. Government at all levels should equally begin to adopt cost-cutting measures including reducing the size of government through rationalization of government MDAs, taking out ghost-names from payroll and cutting the number of political aides. Given its inevitability, the current efforts of the federal government to secure concessional loans from multilateral institutions such as the World Bank and African Development Bank should be supported especially by the National Assembly, part of whose role should be to ensure that such credit facilities are applied only to critical infrastructure projects especially power and transport”, Uwaleke explained.

Also speaking to the Sun on the implications of current oil price crash, the Chief Executive Officer of Zigma Oil and Gas Limited, Mrs Funmi Ogbue, said the time has come for the Nigerian government to focus on domestic use of the nation’s crude.

“We need to use the crude to provide electricity, gas for factories, cooking, cars. This will significantly boost our production capabilities and enable manufacturing. I think the government should also deregulate the downstream sector and relax the terms for Deepwater development. “We need to open up our economy to allow it grow and meet the demands of its growing population. Investors should truly be welcome, and the government can focus on providing essential social services such as security, healthcare and let the private sector do what it does best”, she told Daily Sun.

She also canvassed for targeted tax incentives and social transfers to help people transition from a government driven economy to a private sector driven economy and to minimize the impact of COVID-19 on the most vulnerable businesses and citizens.

Ogbue also encouraged various governments to support businesses at this critical time so that they can minimise personnel lay off.

She also has a word for the government.

“Nigeria runs one of the most expensive governments in the world. So, I expect political office holders across the three arms of government to lead by example by taking some pay cuts and doing away with expensive lifestyles.

But the Lead Director, Centre for Social Justice, Eze Onyekpere is worried that there is little or no money left in the SWF, amidst rising cost of governance.

“We did not save in the times of plenty and now the rains are here. Again, diversification of the economy has been a mantra with no clear follow-up action based on evidence-led policies.

“So many years of the mantra has led to movement in a barber’s chair with no mileage gained. Even if we did not have the coronavirus pandemic and the sharp drop in oil price this year, the world has been gradually inching towards this position because the climate change commitment to stop the production and use of fossil fuel fired vehicles by many countries will still have led to the same result.

“So, for me the earlier we faced this challenge, the better for all of us.

“The plan to borrow $2.5billion from the World Bank and $1billion from the African Development Bank are short term measures which offer no hope in the long term because the loans will have to be repaid no matter the moratorium period and how benevolent the loans appear.

“We need to be looking inwards for strategies to grow our economy by boosting local production and service delivery which increases employment, corporate tax and reduces the pressure on the Naira.  We must enforce the Buy Made in Nigeria policy. It should no longer be an option.

“We should properly manage the diaspora remittances of about $25 billion a year to ensure that we get the foreign exchange to reduce the pressure on the naira. Let the country and the beneficiaries get the full dollar value into the economy rather than the $2.5billion the CBN stated it got – which is likely money that came into domiciliary accounts. “Stop the local banks and their foreign collaborators from withholding the forex out of Nigeria. The country should develop a policy to reverse brain drain in critical sectors while putting our best human resources to use for the development of the economy.

“We should restructure the governance and political sector reward architecture to drastically reduce the cost of governance; merge some MDAs, make them more efficient through greater value for money operations, cut waste especially the leakage of internally generated revenue that should be remitted to the Consolidated Revenue Fund.

“Take a look at the 2016 and 2017 reports of the Auditor-General on the accounts of the federation and you will understand the extent of leakages and rot. If and only if, the Federal Government recovers the mismanaged resources identified in these two reports, we will not need to borrow in the next one and half years to run a balanced budget.

“Further, even if the price of crude oil comes back to normal, the Federal Government should quit the fuel subsidy business and save hundreds of billions”, Onyekpere explained.