Minister of Finance, Dr. Ngozi Okonjo-Iweala | credits: blogs.cfr.org FOR the Nigerian economy, the bad news has been coming in torrents. First, the slow, but steady, decline in crude oil prices morphed into a near crash; next, the ensuing pressure on public finances and market shocks provoked a devaluation of the naira, fire-fighting measures by the Central Bank of Nigeria and raised fears of high inflation in the days ahead. The signs point to possible severe economic adversity to tax the fiscal dexterity of the best governments. Can the Goodluck Jonathan administration handle the looming crisis? And for how long will the CBN be able to defend the new equilibrium rate?
On past and current form, no one will give Jonathan’s government a ghost of a chance. He and his economic team, led by the Coordinating Minister for the Economy and Finance Minister, Ngozi Okonjo-Iweala, will have to rise above their mediocre performance to steer the country out of the ominously choppy waters.
The omens are really bad. Oil prices have plunged briefly below $70 per barrel; their lowest level in five years on Monday also representing a drop of more than $40 pb in five months. This is getting quite exciting. A meeting of the Organisation of Petroleum Exporting Countries in Vienna, Austria, last Thursday failed to agree on production cutbacks and other measures to halt the free fall. Rather, it voted to retain the 30 million bpd ceiling for the cartel. In Nigeria where oil revenues account for over 70 per cent of budget revenues and 90 per cent of external earnings, according to OPEC, the impact of declining crude oil earnings and a devalued naira spell big trouble. The country’s woes are compounded by lower-than-projected daily crude production, the result of theft and vandalism. Average daily crude production in the third quarter of 2014 at 2.15mbpd, down from 2.21mbpd in Q2, fell short of the budgeted 2.38mbpd, said the National Bureau of Statistics. The results have been spending deficits, borrowing and depletion of national savings.
The CBN has rolled out defensive walls, effectively devaluing the naira to conserve dwindling foreign reserves that it has used for decades to prop it up; raising the Cash Reserve Ratio in deposit money banks by 500 basis points from 15 to 20 per cent and maintaining CRR on public sector funds at 75 per cent even as it mopped N500 billion from the banks to staunch excess liquidity and tame expected inflationary pressure. More telling, it raised the Monetary Policy Rate – the benchmark lending rate – from 12 to 13 per cent, signalling even tighter borrowing terms ahead for the productive sectors.
For an import-dependent economy like ours, raising the (official) forex mid-point trading band from N155 to N168 to the US dollar and widening the band around the midpoint from +/-3 per cent to +/-5 per cent, as noted by the Lagos Chamber of Commerce and Industry, “cost-push inflation will be pronounced in the next few months. This will be driven by high cost of production and high cost of finished goods.” The naira rose sharply to N183-186 to $1 thereafter at the parallel market, while the budget assumption of N160 to $1 is in tatters.
Even before the free fall, the Federal Government had gone borrowing, with total external debt standing at $9.51 billion as of September 30 this year, according to the Debt Management Office website; cut back capital expenditure and is set to take another $2 billion from the depleted Excess Crude Account that now stands at a meagre $4.1 billion.
Economists fear that the current naira depreciation is just the beginning: the government will be hard put to meet contract payments, sustain capital projects and achieve macroeconomic stability. The CBN Governor, Godwin Emefiele, wants imports of consumables quickly curtailed and the economy diversified, a view shared by LCCI President, Remi Bello, who said, “An economy that is diversified has a better capacity to withstand shocks.”
Analysts immediately predicted last week that the industrial sector will be further hit by layoffs and large volumes of unsold inventories, while unemployment will rise higher. The biggest fear now is that devaluation will also raise the cost of importing refined petroleum products, thereby erasing any expected price benefit from lower crude prices and compound the inflationary spiral.
Unless it urgently diversifies the economy, provide an enabling environment to enhance productivity and create jobs, cut waste and crush corruption, the Federal Government’s panicky “austerity measures” may not fend off a crippling recession that may spark social unrest as a general election nears. Okonjo-Iweala announced a lowering of the proposed 2015 budget benchmark from $78 to $73pb, a futile gesture, given that experts predict it could go as low as $60 or lower in the face of the US shale production, slower global growth, increased production by embattled Russia and prospects of increased Iranian production if it reaches an agreement over its nuclear ambitions and as Iraq recaptures some of its production and export facilities from Islamic militants. Even some crude oil producers are boasting that lower prices are making their business more appealing.
The situation demands creative thinking and sincerity. There should be no more wallowing in denial. Okonjo-Iweala, who now says abuses and misapplication of waivers and incentives will be curbed vigorously, had denied last year that these abuses persisted. The plan to raise up to N450 billion through taxes on luxury goods is welcome, but will require a strong political will to see it through in a country where corruption, patronage and impunity reign supreme.
The Jonathan administration must think outside the box: to stimulate production and create jobs, urgent policies to prudently and transparently liberalise and privatise the downstream oil and gas; steel and railway sectors are needed, along with a review of the patronage-ridden power sector privatisation. Unless we cut down on excesses and curb corruption, we may be in for more unpleasant economic shock with all its social and political implications.
