•$73 crude benchmark too optimistic
•Falling oil prices not responsible for deteriorating economy
•Expect tough times ahead
•Nigeria has done many things wrong in the last four years
By Omoh Gabriel with reports from Mike Ebo, JonaH Nwopoku
Economists, private sector operators and bankers have concluded that the present economic woes bedeviling the country cannot be attributed to the current crash in oil prices but to the lack of monetary and fiscal policy coordination in the last four years.
They thus blamed the Minister of Finance, Governors who insist on spending the excess crude savings and the immediate past Governor of the Central Bank of Nigeria (CBN) for not working together with the Ministry of Finance to formulate policies that would have ensured the economy was insulated from external shocks. They equally said that the crude oil budget benchmark of $73 for 2015 budget is too optimistic on the part of government.
Taking a swipe at the Monetary and Fiscal policy authorities in the last four years, Managing Director/Chief Executive Officer of Asset Management Corporation of Nigeria, AMCON, Mr. Mustafa Chike Obi said that the toughening economic situation in Nigeria is not only as a result of falling crude oil prices but also a combination of factors, especially some misguided monetary and fiscal policies in the last four years.
Chike-Obi who stated this while delivering a keynote address at the 4th Annual CBO Capital Investors Conference in Lagos, noted that there is going to be tough period ahead for Nigerian economy and that both government debt and inflation should be expected to rise in the days ahead.
“There is going to be a tough period for Nigeria going forward. There are a number of things that have led to this point. Clearly, everybody is pointing at oil prices but pointing at the oil prices as the reason for our tough times is probably looking at a small part of the problem. We have done many things wrong in the last four years.
“We have had situations where monetary policy authorities made so much noise on how they want to offset what the fiscal authorities are doing, so you hear the CBN saying the fiscal policies are too loose and they want to tighten; and the fiscal authorities saying that the monetary policy is too tight and there is a need to make it loose.
“I have long maintained that this is counterproductive and that the fiscal and monetary authorities should work together to achieve the same goal,” he told the investors who gathered to discuss the place of private equity in Nigeria’s economic future.
Economic implication of declining oil prices
Commenting on the issue, Director-General of Lagos Chamber of Commerce and Industry, Mr. Mudal Yusuf said: “The current scenario of sliding oil price is significant and scary. It is at its lowest in four years. For an economy that is 95% dependent on oil for its foreign exchange earnings; and 85% dependent for revenue, this development should be a cause for concern. The single most important vulnerability of the Nigerian economy is its heavy dependence on oil. Crude oil market conditions have profound implications for the Nigerian economy. Current trend with oil price pose major downside risks to some key macroeconomic variables and the general economic conditions. The main impact points include the following: Government Fiscal Operations; Naira Exchange Rate, Capital flow reversals, Stock Market, Foreign Reserves, Inflation, Interest Rate and General operating costs for enterprises.”
According to him: “Declining oil price means reduction in revenue inflows. This has implications for the capacity of government at all levels to meet their statutory obligations. Most states are over 80% dependent on statutory allocations which make the impact of declining oil price very profound. This is even moreso when the culture of big and profligate spending has been entrenched. Already, some states are having issues with the payment of the salaries of their workers. Many have issues with payment to contractors. Major adjustments in government spending (at all levels) is clearly inevitable.
“Exchange rate is a price determined by forces of supply and demand. The strongest factor on the supply side is the forex inflow from crude oil. Therefore, a downward trend in oil price would naturally result in exchange rate depreciation. Exchange rate depreciation would mean new pressures on production and operating costs in the economy which would generate new inflationary pressures. High importation costs will also come with high import duty payment, port charges, VAT as all of these are computed as percentages of import value.
“Trend of oil prices is a major driver of foreign capital flows, especially portfolio flows. This is because the prosperity of the Nigerian economy is perceived to be inextricably tied to the developments in the oil market, and rightly so. For portfolio investors, oil price and exchange rate conditions are major indicators that drive their investment decisions. The impact of such capital flow reversals is often profound in the stock market and the foreign exchange market.
“There is a correlation between stock market performance and the fortunes of the oil market. Nigerian Stock market is well known to be more vibrant when oil prices are high. A major factor in this is the profundity of foreign portfolio investors who currently accounts for about 60 per cent of the market. Their sensitivity to oil price and exchange rate movements is very high.
Furthermore, declining oil price scenario would result in further tightening of monetary policy to preserve macroeconomic stability. The result is high interest rates and superior returns on investments in the money market which could have negative impact on the stock market.
“Declining oil price scenario would reduce the accretion to reserves. Therefore, there is a good chance that the reserves will come under pressure. Besides, the customary disposition of the CBN to defend the naira through increased supply of foreign exchange will take its toll on the robustness of the external reserves. This is even moreso when the excess crude account is on the verge of drying up.
“The likely CBN response to the current scenario is to intensify the tightening of monetary policy. This will further push up interest rates, increase cost of funds to investors in the economy and constrain the access of the banks to investible funds. All these would impact negatively on the bottom line of enterprises in the economy.
“The good news in all of these is the likely moderation of cost of fuel importation. This is well known to be a major burden on the finances of the country. The share of the nation’s resources committed to fuel importation and fuel subsidy is horrendous and perhaps scandalous. It is hoped that declining oil price would moderate this cost.
Looking at the issue, Mr. Egheomhanre Eyieyien, Chief Executive Officer, Pharez Ratings, a Securities and Exchange Commission (SEC) registered credit risk rating agency, commended the response of the Federal Government so far, concerning the falling oil price, saying that the austerity measures just introduced are inevitable and are welcome.
Eyieyien, who is a senatorial aspirant for Edo Central Senatorial District, however, faulted the proposed crude oil price benchmark of $73 per barrel for 2015, declaring that it is too optimistic. He said: “The challenges we now face on account of the fall in crude oil price in the international market were foreseen as far back as 2003, by no less a person than the Coordinating Minister of the Economy, Dr. Mrs Ngozi Okonjo-Iweala, who introduced policies and measures to conserve our foreign exchange earnings and provide a buffer against times such as we are now in.
“Unfortunately, the state governors are still contesting the constitutional propriety, and rightly too, I regret to add, of the Excess Crude Account and the National Sovereign Wealth Fund, which should have been sufficient to weather the crisis.
Even a couple of days ago, there were still calls from the states to disburse $2 billion from the Excess Crude Account so that the governors can ‘fund their projects’ which cannot but be suspicious with the general elections being imminent.
“The austerity measures just introduced are inevitable and are welcome. But can the Federal Government resist the temptation to continue its expansionary fiscal stance with so many outstanding infrastructure projects especially in the run-up to the presidential election?
“I think the new budget crude oil price benchmark of $73 is rather too optimistic. I think the market price could fall below $70 in the near term. However, with the heavy snow storms hitting the western hemisphere, crude oil prices could rally again between December 2014, and March, 2015. “The bottom line: Nigeria needs to go beyond mere sloganeering and actually work effectively at diversifying our nation’s foreign exchange sources. It is time to focus on agricultural exports and the commercial exploitation of our vast solid mineral resources.”
The impact of the falling oil prices may not be felt much on the Nigerian economy, if the government imbibed saving culture, said Mr. Bekuochi Nwawudu, the Director of CBO Capital, a Lagos-based investment advisory and project development.
Nwawudu, while reacting to worries being expressed by some Nigerians about the continued downward trend of global oil price said that Nigeria should save more now for the rainy days.
“We should save more now. The Federal Government should save more with the Nigerian Sovereign Investment Authority, NSIA, while at the state level, there should be matching funds as well as tax breaks,” he said.
This came as the Managing Director of Seplat Petroleum Development Company, Mr. Austin Avuru, said there is no need to panic as oil prices will still go up, “but when? I do not know.” Geographies are shifting, but the energy mix as well as the demand and supply equilibrium has not changed much,” he said.
Avuru explained that technology has made it possible to discover more oil in the world to satisfy the global growing demand. According to him, ‘thanks to technology and pricing; there is still enough oil and gas to satisfy the growing demand through 2040. Wind and renewable have failed to be the solution.”
However, Nwawudu cautioned that given the country’s dependence on oil, the fall in prices will affect the foreign exchange and interest rates. ‘’Given oil’s current share, a significant fall in the price will have an immediate impact. This would be felt through foreign exchange rates and interest rates, then falling budgets and government spending,’’ he said.
Speaking on the impact of the price fall on the budget which benchmark is $78, he noted that although the price is still above the benchmark, it is not going to harm funding; only that less ‘excess’ will go into the excess crude account or the NSIA.
He argued that the market view is that the price fall is likely to be short-lived, “so possibly, no cause for alarm.”
“There could be risks to the budget, but at this level, it is more likely that increased borrowing could fill the gap; we have low debt to GDP ratios. We also have solid reserves and these can be used to defend the currency in the near term.
“The question for us though is – why are we worrying? Why is the whole country watching the oil price? Is this how we should be thinking in 2014 and what Nigerian livelihoods and welfare should be exposed to is the hedging model.
According to Mr. Walker Ogogo, Registrar of the Institute of Capital Market, the best way to cushion the effect of the falling oil price is for the government to diversify the economy beyond oil. Though he said that something is already being done along that line, he stated that it might take a little longer for Nigerians to start feeling the effect of measures being put in place by the government.
He said: “There is nothing we can do about the falling oil price because there are so many factors that are playing out there, so our economy will continue because already the growth rate of the Nigerian economy is about six to seven per cent annually. That is likely to continue, but what we are now saying is that our economy should no longer be dependent on oil-related products, we should diversify and I tell you, something is already being done in that direction though we are not feeling the effects perhaps because the cost of operation is very high.”
Continuing Chike-Obi noted that for every economy, there are four things that are very crucial and that Nigeria must pay close attention to those factors if it must make the desired economic progress. “I think that for Nigeria, employment is the most important. We must have a policy that encourages massive employment. A situation where we have 25 per cent of high unemployment and youth unemployment is over 40 per cent is clearly unsustainable.
“The second is low inflation rate. Inflation being low and managed is important. There is also a need for a stable exchange rate. There ought also to be low interest rate to encourage lending to the economy.”
He further said that the authorities must make the right decision by taking the best strategic path to stabilising the exchange rate, adding that pursuing a stable exchange rate in nominal terms as against real terms will spell doom for the real sector of the economy.
”We in this country seem to have decided that maintaining a stable exchange rate in nominal terms was the most important variable. And the exchange rate that is stable in nominal terms, in Nigeria’s case against the dollar, was actually strengthening in real terms and would, in due course, have made sure that no manufacturing industry in Nigeria was sustainable.
“I will give you a very general example. If you can buy a loaf of bread in the US for $1 and you can buy the same in Nigeria at N160, now that is the true exchange rate based on purchasing power parity. Now, if a year later, inflation in Nigeria is 10 per cent and that bread is now costing N176 but still costs $1 in the US, then any rational person in the US will buy the bread for $1 in the US and then sell it in Nigeria for N176, exchange the dollar at N160 and make N16 profit and if that continues for two or three years, all the bread makers in Nigeria will go out of business and we will resort to importing bread because the exchange rate is encouraging it.
”To offset that, all we need to do is to change the exchange rate to N176 by next year, so that the man who buys the bread in the US and sells in Nigeria and sells at N176 and changes it back to the dollar does not make any profit. That is the difference between managing the exchange rate in real terms versus managing it in nominal terms. So, we must change our perception that because the naira moved from N160 to N165, it weakened, it could actually have strengthened. So if we are interested in employment and maintaining our competitive advantage, we must manage exchange rates based not on nominal but in real terms.”
What is important to the economy at this time:
According to the AMCON boss, “The first thing we need is policies that focus on what is most important to us. I believe that given the insecurity and unemployment in Nigeria, we must embrace policies that encourage industrialisation and manufacturing to boost employment generation. That’s the way we can go forward.”
Prediction for the economy
Speaking further, he said given the present economic circumstances, especially in the money market, he expects that, “there is going to be a two-tiered naira scheme where important things trade at official exchange rates and let go of some unimportant things. I think the CBN has started doing that. I think we are going to the point where things like school fees, medical bills and air tickets will be exchanging at a higher rate while things like machinery, equipment will be exchanging at the official exchange rate.
“We are also going to see inflation increasing. I think we can tolerate inflation of up to 10 to 12%. There is probably going to be more debt. The Nigerian public debt to GDP is between 10 to 12% and that is too low. The US has a public debt to equity, they say is 60%, but they are not telling the truth. The guarantees of the US Government to 37 agencies amount to 90% of their GDP, so if you add guarantees and actual debts in the US, the public debt to GDP is about 150%.
“And that is a developed country with roads, power, water, schools, trains, airports in almost every city and still they think they need public debt of 150% but we in our wisdom, we are 12% with very little guarantee from the FG. The FG must engage massively on a guarantee scheme. I suggest that there should be a federal guarantee agency and that when the government decides its priorities, that agency should decide how the guarantee in that sector will work.
“If we want to build roads for example, banks should be able to lend to the roads through a guarantee scheme. The lending should be guaranteed by the Federal Government in some form. I think we must use the Federal Government balance sheet much more efficiently. 12 per cent will not do it. No country has ever developed with 12 per cent public debt to GDP and no country ever will.”