Oil price crash: Moment of truth Published By Nigeria PUNCH Newspapers Editorial Board

CRUDE prices are hugging rock bottom as the COVID-19 pandemic ravages the world, threatening oil-dependent economies. Output and prices are not expected to return to pre-virus levels for years, crude oil market watchers say. For Nigeria especially, disaster and the proverbial lean years are a stark possibility for which the country and its leadership appear to be unprepared. Should prices and demand persist at the current red zone, the economy may cave in and endanger the country’s fragile fabric.

The moment of truth, long delayed – but also for long foretold – may have finally arrived. The country’s estimated 200 million-strong population faces a recession that may prove worse than all previous ones. A potential debt crisis could hit commodity exporters like Nigeria hardest. To add to the palpable anxiety, its wretched economic scorecard does not inspire confidence that the regime of the President, Major General Muhammadu Buhari (retd.), can muster the creativity and novel strategies required to stave off catastrophe.

By April 27, the country’s premium Bonny Light was quoted at $14.67 per barrel by industry monitor, Oil Price.com, reflecting its recent rating below the benchmark Brent crude that traded at $18.85pb. Recently, it had sold for as low as $10 to $11pb on the spot market, a price far below production cost. Mele Kyari, the Group Managing Director of the Nigerian National Petroleum Corporation, confirmed that Nigeria’s oil cargoes “are stranded in the market,” laden on ships and desperately looking for buyers. Even before the latest downward spiral, the government had revised the 2020 budget benchmark price from $57pb to $30pb. This too is proving unrealistic.

The oil curse is unrelenting. The major oil producers and the Organisation of Petroleum Exporting Countries have agreed to cut global production by 10 million barrels per day as crude traded below production costs. For Nigeria, that translates to another downward review of projected production from 2.3 million bpd to 1.4 million bpd, excluding condensates, with no guarantee of buyers, while the COVID-19-induced global contraction persists. Until major buyers like India, China and the West recover, demand will remain depressed.

No country is immune to the global recession, but oil-dependent economies are particularly vulnerable. Mono-product ones like Nigeria with little export diversity may simply implode, says Bloomberg. Oil and gas account for 90 per cent of export and 80 per cent of government revenues. With the 36 states and the 774 local government areas dependent on allocations from this, there will be little to spend on providing critical infrastructure (the first target of cutbacks), pay public sector salaries or maintain social services.

External reserves fell in March by 12 per cent to $33.8 billion, constraining the ability of the Central Bank of Nigeria to sustain its defence of the naira that crashed to N425 to US$1 by March end in the autonomous market from N402 to $1 and from N302 to N360 to $1 in the official window. Inflation rose to 12.26 per cent in March.

Reflexively, the government is going for even more loans: apart from $22.3 billion and N850 billion packages already approved by the parliament, a new $6.7 billion credit is in the offing, while the IMF is set to approve $3.5 billion as the country exercises its Special Drawing Rights. By December 2019, the country’s total debt profile stood at $84 billion with a foreign component of $27.67 billion. There is little or no thought on how the huge debt account will be serviced when the oil prices turn southwards. Unlike other major oil exporters that had prudently built fiscal buffers, Excess Crude Account is down to just $71.81 million and the government has quickly reached for $150 million from its meagre Sovereign Wealth Fund of $1.69 billion. But in their hour of need, far-sighted Norway, Abu Dhabi and Kuwait can count on their $1.1 trillion, $824 billion and $520 billion SWF respectively. Diaspora earnings that the National Bureau of Statistics said rose from $3.24 billion in 2013 to $25.08 billion in 2018, is forecast by the World Bank to decline by 23.1 per cent.

Where does this bleak future leave Nigeria? To survive, the country must adopt and implement pragmatic and intelligent policies. The first is to take politics out of economic decisions. Our ironclad position on restructuring is anchored on the need to build a competitive federalism where every federating unit will be a productive centre rather than a cost unit. The waste of resources in the obsessive search for oil in the Chad Basin, a venture motivated purely by sectional/primordial considerations and has reportedly cost over $2.5 billion, should stop immediately.

Creative and progressive governors should not wait for political restructuring before undertaking a radical reform of their economies. Many states in the United States already have economies that are comparable to some of the world’s largest countries. Their best bet is to embark aggressively on the promotion of productive knowledge and agro-business.

Second, the Buhari regime should immediately cut down on huge expenditures in maintaining public officials. It will be a crime against the Nigerian people if public officials continue to revel in opulence while the majority of citizens wallow in penury. Federal legislators must stop insulting the citizens by their brazen prodigal lifestyles.

There are more things to be done. The Economic Sustainability Committee headed by Vice-President Yemi Osinbajo needs to come up with actionable and result-oriented policies with job-creation, diversification of exports and income, and a private sector-led economy, as its top priorities. Public finance at the federal and state levels should be economic-driven and sector-focused.

UNCTAD recommends going for low-hanging fruits such as agriculture that contributes 24 per cent to the GDP and provides 70 per cent of rural employment. Mining should be opened up for massive private investment to provide the raw materials for effective industrial take-off; and rejuvenating the textile, apparel and garment industry, food processing and pharmaceuticals.

The economy needs a massive infusion of Foreign Direct Investment that was a main catalyst in creating the industrialised, export-led economies of Japan and the Asian Tigers. This can be achieved by giving added impetus to the Presidential Enabling Business Environment Council and liberalising policies to push upward modest improvements in the World Bank’s Ease of Doing Business ranking from the 136th position in 2020. Cutting red tape, deploying cutting-edge technology tools, crushing corruption and reducing the role of government strictly to regulation in the economy, are proven global standards for success.

Selling off the four state-owned refineries, the Ajaokuta Steel and other commercial assets will free the government from spending on loss-making ventures and open the way for FDI, local capital to run them more efficiently and create jobs to reverse the explosive 36.5 per cent youth unemployment. Another strategy is a new liberal framework and repeal of the Railway Act 1955 that imposes federal monopoly on the sector. Port operations should be privatised to draw in the world’s best operators.

Reforming the tax system and maximising the current opportunities are crucial: a former federal director-general of the Budget Office, Bode Agusto, argues that over N14 trillion can be realised by compelling 200,000 wealthy individuals and corporate firms to pay due taxes. A former CBN governor, Chukwuma Soludo, says N30 trillion can be collected annually simply by plugging fiscal leakages. Bizarrely, the government has not shown any enthusiasm in enforcing a Supreme Court judgement authorising retrieval of $62 billion in unpaid remittances from oil majors. States need to become viable competing economic units, instead of wasteful cost centres.

It is an uncertain economic future for Nigeria. It is not feasible to diversify export revenues with a weak small and medium enterprises sector. It accounts for 60 per cent of China’s GDP and 80 per cent of its urban jobs; provides 65 per cent of employment and 49 per cent of GDP in Singapore. In South Africa, it provides 47 per cent of all employment and 20 of GDP. In the OECD countries, SMEs account for 99 per cent of all businesses, over 50 per cent of value addition and 30 per cent of jobs. Robust policies, especially by improving power, without which the economy can never fly, low-cost credit and a tax-friendly system, will spur growth.

There should be urgency in completing ongoing infrastructure projects that will propel recovery such as the Apapa access roads, Lagos-Ibadan, Kano-Abuja highways, ports, Second Niger Bridge and the international airports in Lagos and Abuja. These measures need clear thinking and the courage to see policies through. The time bomb is ticking and this may be the last chance to end the country’s profligate ways.

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