Oil prices have been on a freefall with the Brent Crude tumbling from 2014 peak of $112.42 on June 1, 2014 to its current price around $70 per barrel. It has been analyzed that oil price is under intense attack with global oversupply of oil, weak economic growth in emerging economies, the drastic improvement in alternative shale gas technology, the continuous effort of US to achieve oil independence and recent global political tensions.
The final chance, which would have been to regulate supply through OPEC, was cut off, with the cartel sticking to its 30m barrels per day output target. The reality is that we have to pay for years of wasting our boom in the period of high oil prices. Nigeria has experienced six (6) oil booms with the starting years as – 1973, 1981, 1990, 2002, 2008, 2011 – and this leaves us in shock, without accurate explanation of how the recent oil boom was managed.
Nigeria’s external reserve in the midst of another boom was $62.07bn as at September 2008 and we wonder why we are scraping to reach $37bn despite oil prices above $100 per barrel for 41 consecutive months. Excess Crude Account will be under pressure for another round of distribution with its current balance at $4.11bn. A quote in the Central Bank MPC Document for October 2011 is striking and states that “Similarly, the (Monetary Policy Committee) expressed concerns about the genuineness of demand for petroleum imports. This year alone, oil importers have bought over US$7.0 billion from wDAS, thereby, depleting the Nation’s external reserves. This demand, in the Committee’s view, might have been fuelled by rent-seeking and subsidies.”
With conscious effort not to tackle the scourge of crude oil theft, reforming the state oil company (NNPC) and also the theft of subsidy, Nigeria has found itself in this open goal with no players in her defence. While other countries understanding the volatility of oil and the need to invest revenues from the vanishing commodity have built a bulwark in Sovereign Wealth Fund (SWF), Nigeria has managed to build SWF with a balance of $1.55bn which is grossly low compared to other oil giants – Angola ($5bn), Saudi Arabia ($763bn), Algeria ($77bn) and Qatar ($1tn) and so on.
Implications for the Budget
The Monetary Policy Committee of the Central bank stated in its Policy statement delivered on November 25, 2014, that setting Oil Price benchmark at $73 per barrel is grossly optimistic. The oil price benchmark and oil production target is what the Government at all level use in determining how much revenue will be shared. A quick peep into history, when the subprime fiasco nosedived into the global financial meltdown, Nigeria’s “conservative” $45 per barrel oil benchmark of 2009 and the result card at year end is a lesson that is under review and debates.
Some believe that the devaluation of the Naira from N155/$1 to N168/$1 and falling revenue from crude oil should help out. Yes Technically- the government should now earn N16,800 on every $100 receipt from crude oil instead of the N15,500 we are used to in the old order. History however proves otherwise. The Gross revenue of the Federation dropped by 38.5% from N7.87tn in 2008 to N4.84tn in 2009 despite the CBN devaluing the exchange rate from N117.98/$1 (Jan 2008) to N150.85/$1 (Nov 2009). Worst still, Nigeria’s external reserve was at its peak of $62.08bn in Sept 2008. Today, we have less than $37bn.
The effect in terms of inflation in service and goods used by the government and the tail wind that will take recurrent expenditure to another high is a debate for another day. History again tells us the Recurrent Expenditure bill of the Federal Government increased from N2.12tn in 2009 to N3.10tn in 2010, N3.31tn in 2011, N3.32tn in 2012 and N3.68tn in 2013.Some theorist love to couple the devaluation of the currency and intensity of growth in Recurrent Expenditure (payment of salaries, allowances, payment of debt servicing, compulsory payment to government agencies (National Assembly, Judiciary, INEC) and running costs of government). we will again hold on to history.
What is left of the nailed down revenue squeezed out from our diminishing Oil and gas reserves? The congenitally deformed Tax system? Or in budgeting terminologies- The Non-oil revenue? How do we navigate through the gory times? Salaries have to be paid, interest on debts has to be settled and the machinery of governance must run. The 2013 Budget Implementation Report (though provisional), N3.5tn was the total revenue of Federal Government from oil, taxes and other sources and the recurrent expenditure bill of the Federal Government was N3.6tn. In plain English, the Federal Government spend the entire oil and non-oil revenue running government on recurrent items when oil price was above $100 per barrel. What of capital budget? How have we been funding capital budget? It has been borrowing and more borrowing.
Nigeria had an actual deficit (difference between revenue and expenditure usually raised through debts and savings) of N1.1tn in 2013 which is 22% of the entire budget. To finance the deficit and fund capital expenditure, a total of N781bn was borrowed from local and international lenders, N223.93bn was borrowed from special accounts (Ecology, Stabilization and Natural Resources Account) and N195bn as FG share of stabilization accounts. With decline in oil prices, Federal Government of Nigeria will possibly not have N3.6tn revenue it posted in 2013. Our internal analysis estimates that at $70 per barrel with average exchange rate of N170 to $1 and oil production at 2.23mbpd (first quarter figures), Federal Government’s total share of revenue is estimated at N2.95tn.
Last year, Federal Government compulsory record payment to service debt was N828bn and with another expected charge this year, less than N2.12tn will be left to pay wage bill, pensions, service wide vote, statutory transfers and the rest which already gulped N2.77tn in 2013 leaving a gap of N650bn additional deficit that should not be funded with debt. This means Nigeria will have to possibly borrow this to run government and pay salaries unless it finds other means to raise revenues. The deficit for next year in actual terms will nearly hit N1.8tn (from N1.1tn in 2013) considering need for capital expenditure and related elections cost. This leaves government looking for at least N600bn extra to meet its recurrent obligations. The Minister of Finance has said she will tighten the loopholes and also raise N480bn from luxury tax and there are also possibilities from reduced subsidy payments due to low crude prices.
The key questions will remain if government will truly adopt austerity measures in its conduct of business thereby taking haircuts in its overhead costs. Will we increase our oil production output, reach 2.5mbpd target which guarantees estimated additional N400bn? Will statutory institutions like the National Assembly cut down its blanket N150bn that has no detail? How much is left in the special accounts and will FG go ahead and take discriminately from it again? Will we reform NNPC and allow it to be more transparent in receipt of oil revenues to every Nigerian, raising its level of efficiency? Will FG rethink on how it expands its tax base to raise its share of non-oil revenue which stood at N760bn in 2013? Will we give indiscriminate waivers thereby losing scarce revenues again? Will independent government agencies double their contribution to the Consolidated Revenue Pool?
These are times for tough choices for Federal Government, 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.
Kindly download our full report here that analyses these ‘interesting times’.