By Omoh Gabriel
When President Buhari came into office on May 29, 2015, the economy had some cracks in its walls.
It was like a walking shadow shielded by the high price of crude oil. How deep the crack was, no one could tell at the time because of the smoke screen of high oil prices, until recently when the price of crude came crashing to below $40 per barrel.
Immediately he took office, things were looking up, and there was hope in the polity that things will get better.
The APC propaganda organ told Nigerians that there was already regular power supply and adequate fuel as a result of President Buhari’s body language. Nigerians were happy for the Change. But sooner, the body language that seemed to be working in checkmating the notorious oil cabals faded away. The hope for a better welfare for the Nigerian people started to dim.
A President who made some mouth-watering promises to the electorate, in the misplaced belief that the nation has a robust economy, started retracting the promises made during the electioneering campaigns.
The truth is that the economy was badly hit by falling global oil price. It looks like a repeat of 1982 oil price crash that compelled President Shehu Shagari to declare austerity measure in Nigeria. Adjustment was badly needed to redress the sectoral imbalances in the economy. The President wasted some great moments he should have seized to move the economy forward. He did not appoint key officers on time. The delay caused investors to adopt a wait-and-see stance on the economy.
During the several months of waiting, there was no policy direction for the economy. The economy drifted. The government in its pursuit of political rogues introduced the Treasury Single Account which led to the pulling out of government funds from the banks.
The economy became cash-strapped as a result of the policy. Within the economy, households, government agencies and companies suddenly discovered that they could not pay their bills. The inability of clients to meet contractual obligations in a timely manner impacted every sector of the economy negatively. Companies and state governments had works on numerous projects suspended, took planned measures to proactively mitigate effects on businesses and started the reduction of accounts receivable, overheads and reduction of staff. As if the situation was not bad enough, within the one year of this administration, the Niger Delta militants resurfaced; and there has been decline of oil production – currently output is at 1.4mpbd, instead of the 2.2mpbd – thus, reducing the revenue flow into the Federation Account. The economic situation has been further compounded by the rising inflation, which has struck the double-digits at 13 per cent, making it difficult for harmonisation of fiscal and monetary policies.
While Buhari and his economic managers were pondering whether to devalue or not to devalue the naira, the nation’s foreign reserve took a plunge and could hardly support growing import. The nation’s cash cow, crude oil prices, suffered 64 per cent decline from $114 per barrel to $40/barrel. As Nigeria depends 90 per cent on oil revenue for foreign exchange earnings, the accretion to foreign reserve dipped further and the nation could not support high level of importation.
GDP went down from 6.3 per cent in 2014 to 4.0% in 2015.
As a result, in the last one year, unemployment and underemployment rates have increased, external reserves have come down to $ 27 billion while the nation’s credit rating was downgraded to Ba 3. The last one year has seen the lowest level of Federation Account Allocation Committee funds shared among the three tiers of government in six years. Quite unfortunately for the Buhari administration, it has to administer bail out pills to states which could not pay their workers in a program for 24 states from Banks.
The first reaction from the CBN was to restrict 41 items from having access to foreign exchange. While this was going on, foreign exchange scarcity hit the economy as the price of crude plunged further to about $34. The economy under Buhari has slowed from GDP growth rate of 6 per cent to 1.9 per cent in first three months of 2016. The economy perhaps suffered from lack of timely intervention from the public sector as the 2016 budget was over-delayed due to the controversies that trailed its submission and subsequent allegation of padding. Eventually the N6.06 trillion budget was passed, having been styled budget of change.
The budget seeks to reflate the economy and the sum of N350 billion is to be injected immediately into the economy as debt payment to construction companies which have abandoned their construction sites as a result of non-payment for work done.
The expectation is that with the high level of honesty and integrity of the person of Buhari, the 2016 budget will be fully implemented to bring relief to the nation and for the economy to turnaround. The budget aims at the diversification of the economy with emphasis on improvement on internally generated revenues by federal and state governments. A substantial part of the budget is to be financed from non-oil revenue such as taxes, custom duties among others. In the midst of the economic hardship however, the government, early this month, decided to hike the pump price of fuel from N86.50 to N145 per litre, thus removing fuel subsidy.
Subsidy payments have in the past constituted a huge drain on public finances. In 2015, N680.0billion – equivalent to the capital vote for the year and 17.4 per cent of recurrent spending of the federal government – was paid to marketers for accumulated debt despite sub-$50.0/barrel crude oil price. If the previous price cap of N86.50/litre had been maintained post-adjustment of the pricing template to an exchange rate of N285.00/$1.00) needed to incentivise private marketers to start importing petrol, subsidy payment would have increased to N58.50/litre or N81.6 billion per month and estimated N979.2bn in a year. This would have been equivalent to 54.4 per cent of annual capital vote and 120.0 per cent of annual oil revenue of the federation assumed in the 2016 budget.
Besides, the fact that paying such humongous amount as subsidy payment would have implied extra-budgetary spending, since the recently passed budget does not make provision for it, the current revenue structure could barely accommodate it. Revenue estimates in the budget is already under threat due to the vandalism of oil installations in the Niger Delta which has pruned oil production as assumed in the 2016 budget. If the cost adjustment had not been transferred to retail consumers, the federal government’s share of the $550.0m Federation earnings from oil in April would barely be enough to cover subsidy payment for May.
A confluence of negative developments ranging from a sharp fall in the production of oil, deepening external reserves, spiralling inflation and sharply lower Gross Domestic Product (GDP) growth has hit the Nigerian economy in quick succession. There has hardly been a time in the history of Nigeria that the Central Bank has been faced with such stark and hard choices. Unfortunately, there is no silver bullet. But a silver lining is the new flexible foreign exchange policy adopted last week by the CBN.
As the President prepares for his first year anniversary in office, there is wide shortage of raw material in industries but the policy makers are pushing for diversification of economy, development of non-oil foreign exchange earnings.
The government through the 2016 budget has built into it what it termed “Economic stimulus program” in which it hopes to start the reconstruction of the North East and the rehabilitation of internally displaced persons, implementation of the national integrated infrastructure master plan, Nigerian Industrial Revolution Plan, National Enterprise Development Program and International assistance from development partners. Through spending on these programs the government hopes to push the economy out of recession. How far they will go is yet to be seen.