A thin ray of light has pierced Nigeria’s gloomy skies. International crude oil prices held steady above the $55 per barrel threshold on Friday while, two days before, the World Bank reaffirmed its forecast of a return to positive growth for Africa’s largest economy. The prospects present two classic challenges: managing revenue from the price rally and steering the economy away from oil dependency onto the path of sustainable growth.
Past performance by our economic managers discourages optimism. However, four successive quarters of negative growth, continued sabotage of crude oil production facilities, depleted foreign reserves and buffers and 27 million-strong unemployed army demand better fiscal behaviour by a government that claims a change agenda.
The glimmer of hope was kindled late in November last year when the Organisation of Petroleum Exporting Countries, for the first time in eight years, reached an agreement to cap production at 32.5 million barrels per day, which entails reduction of cartel members’ combined production by 1.2 million bpd. The breakthrough also saw a landmark deal where non-OPEC members like Russia and Kazakhstan would eventually also cut down production by 600,000 bpd. The announcement immediately provoked a price rally that has continued, with the benchmark Brent price (comparable to Nigeria’s Bonny Light), hitting slightly above $58 pb at a stage.
For the cartel, and cash-strapped Nigeria especially, this has been cheery news indeed. From $99-$102pb in mid-2014, oil prices have nose-dived, dropping to as low as $27.10pb in January 2016 and devastating oil-dependent economies. The United States Energy Information Administration had projected the 13-member countries of OPEC to earn a combined $341 billion from crude in 2016, just above half of what they earned in 2014 and a far cry from the record $920 billion earned in 2012. In Nigeria, the figures are stark: some $77 billion flowed in from crude revenues in 2014, according to OPEC Revenues Fact Sheet; IEA recorded the country earning $99 billion in 2011, the highest; $94 billion in 2012; $84 billion in 2013, and $70 billion in 2010. Total earnings from crude in 2016 will not reach $40 billion, according to some analysts.
Since Nigeria has for decades, relied on oil revenues to fund over 70 per cent of its national budget, a folly replicated by 35 of the 36 component states and 774 local governments when only nine states (Lagos became the 10th last month) are producing crude, the economy has been badly hit. From an average 6-7.3 per cent growth rate, the economy has been contracting from the last quarter of 2015 and final International Monetary Fund projection for 2016 was minus 1.7 per cent. Exchange rate instability has brought the industrial sector to its knees, inflation and unemployment reached 18.3 per cent in 2016 and 13.9 per cent in October 2016 respectively, said the National Bureau of Statistics, which just raised the alarm that 27.1 million Nigerians are jobless.
President Muhammadu Buhari and his economic team have another chance to turn adversity around and restore the country to the path of development. There is no new oil boom; higher prices only provide the desperately needed respite from today’s woes. It is an opportunity to build up foreign reserves that stood at $26 billion in December, barely enough for four months imports and down from an average of $47 billion in 2013-2014. There should be a three-prong strategy to raise reserves, rebuild buffers and diversify revenue base away from crude oil.
Providentially, the 2017 national budget has a realistic oil price anchor of $42.5 per barrel, meaning that if expert forecasts of oil price range of $55-60 pb through 2017 hold, we could begin to rebuild the Excess Crude Account buffer that former presidents Umaru Yar’Adua and Goodluck Jonathan recklessly ran aground between 2007 and 2015. Former President Olusegun Obasanjo had launched the fund when crude oil prices were barely $37 per barrel.
It is, however, crucial for Buhari to ensure the 2.2 million bpd budget target is met to enable Nigeria benefit from the price rally. This will mean subduing the militants of the Niger Delta who have been bombing oil production and distribution facilities. Their criminality cost the country a daily loss of 800,000 bpd, as confirmed by Vice-President Yemi Osinbajo, effectively constraining production to an average 1.4 million bpd, which OPEC, however, said hit 1.7 million in December.
Reality has already compelled lower dependence on oil sources for revenue to fund this year’s budget; non-oil revenues and independent sources are projected to provide 59.05 per cent of total revenues, while oil will bring in N1.98 trillion or 39.47 per cent. Only urgent liberalisation of key sectors and rapid and transparent privatisation targeting global top notch corporations can bring in the much-needed Foreign Direct Investment, without which the economy cannot diversify its export and foreign exchange sources. We must draw in investors into mining, agriculture, steel and oil and gas downstream or continue to wobble along until the untenable national edifice collapses.
Buhari should stoutly resist pressure from the fiscally reckless state governors to simply continue sharing excess crude earnings and unlike his predecessors, ensure that the Federal Government’s share of such extra allocations is saved. The state governors should be responsible by cutting costs, waste and luxuries.
No one expects another oil boom; Buhari should come up with a strategic economic plan and stimulus targeting job creation, exports and food self-sufficiency.
