By Dele Sobowale
“I mean if we have a Santa Claus day, then $60. But, frankly, looking more to mid-50s.” Dr Ibe Kachikwu, Minister of State for Petroleum Resources. In Vienna. NATION, December 2, 2016, p 11.
The Honourable Minister was speaking in Vienna after the Organisation of Petroleum Exporting Countries, OPEC, had voted to cut supplies for six months in order to firm up the price of crude oil globally. OPEC went further to exclude Nigeria from the widespread cut because the other members had long regarded this country as the “poor cousin” whose dependence on crude revenue is almost total – unlike others. So, Nigeria was allowed to keep its 2.2 million barrels per day quota.
On the face of it, that was a magnanimous gesture on the part of the other OPEC members. But, in reality, it was a cynical ploy. Given an overall cut of about five per cent, Nigeria would have had to reduce its quota to 2.1 million per day if not exempted. But, OPEC members were aware that Nigeria’s exports in 2014 to 2016 had never once reached 2 million. This year, given disruptions in the Niger Delta and competition from abroad, the nation had averaged only about 1.85 million barrels. OPEC, in fact, granted us a favour which they are almost certain we will not enjoy in 2017.
More worrisome is the Minister’s enthusiasm for crude selling at $60 per barrel. As he himself remarked, “If the prices are high, the incentive for shale production to begin to clobber back is also high.”
In fact, experience in the past two years, since shale oil producers in the United States started exporting suggests that once global crude climbs above $55 per barrel, shale oil exports start – driving the prices back down again. OPEC and Nigeria might have been caught in the tragedy of Sisyphus the Greek mythical hero who was condemned to rolling a huge rock up a hill – only for it to roll back down again and he has to start all over again.
The reason for dwelling at length on the outcome of the OPEC agreement is because of the likely impact it might have on the expectations for crude oil revenue next year by those charged with preparing our budgets. Price per barrel alone does not determine aggregate revenue; it is the combination of price and volume that does. Meanwhile, OPEC, despite its huge oil reserves no longer has the final say on the actual price of crude oil.
Furthermore, the producers have aimed for increased crude price while forgetting that what they are attempting to do is to pass on cost increases and inflation to the consumers who are free to shop for alternatives. So, the OPEC agreement might constitute a slender reed on which to lean for Nigeria.
Meanwhile, the 2017 Budget proposal is already making history, but not exactly the way the Federal Government intended. It is the first budget in living memory that has been rejected by the National Assembly, NASS, long before the President formally lays it before the joint sitting of the legislators. Virtually, all the main components are now being disputed and subjected to hostile commentary.
Most Senators don’t believe that the N7 trillion budget proposals are realistic – given what had been achieved this year against a N6.05 trillion budget. Gross Domestic Product, GDP, growth rates have been dismissed as quixotic. A former Governor of the Central Bank of Nigeria, CBN, Emir Sanusi Lamido, had declared that “I can tell you for free, if the Senate today approves that we can borrow $30 billion, honestly, nobody will lend us.
It should be approved and I will like to see how you will go to the international market with an economy that has five exchange rates.” Talking of exchange rates, many leading economists and international finance experts, have observed that the exchange rate adopted in the budget proposal is, according to one expert “totally ridiculous”.
“Behind the facts of economics are the facts of psychology…the emotions of fear and confidence, the judgments of doubt and certainty, constitute a very important medium through which we see economic values.” Arthur Stone, Harvard Business Review, October 1923. (VANGUARD BOOK OF QUOTATIONS, VBQ, p 45).
Against all these criticisms the President’s Economic Management Team, EMT has no coherent and convincing answer. That is precisely the cause for concern. The EMT operates as if its proposals are sent to people without the emotions of doubt and certainty. Because they want to present another “record budget”, they expect everybody to applaud.
They forget that it is almost impossible to convince anybody that tomorrow will be good when yesterday and today are demonstrably miserable. They also seem to forget that the first month of the year 2017 starts in less than four weeks and morning shows the day. What have they put in place in December to convince fellow Nigerians that January will be the start of a new dawn?
What in fact, has happened in 2016 and what conclusions can be drawn from it? First, it is a fact that the 2016 Budget planned to share N5.7 trillion between all the three tiers of government this year. That works out to approximately N478 billion per month. Budgetary calamity struck early in January 2016 when only N417 billion or 87 per cent was available for allocation.
The situation got progressively worse in February 2016, when there was only N370 billion or 77 per cent of expected allocations. In March, the allocation hit the basement at N299 billion or 62 per cent. Last month, N420 billion was available. Records would show that from January to October – ten months – only in two months were the monthly averages exceeded.
That is reality. To that we can add extrapolations for likely allocations for November and reach a fairly accurate estimate of what the year 2016 will end up. Certainly, N6 trillion is out of the question. The GDP growth rate assumed had since become an embarrassment with the recession and negative 2.24 per cent growth. Actual exchange rate is way off what the budget suggested; interest rates have soared in tandem with liquidity crunch and foreign exchange scarcity and the deficit is far above what government proposed. If ever there is dark cloud without a silver lining, the actual performance of the economy in 2016 is it.
With that brief summary of the 2016 budget, it should be clear to the EMT and the President who still has confidence in them why nobody else does. Nobody or group of managers who had achieved this sort of total failure in the current year can expect to be taken seriously when they propose a bigger budget. The question now is: what is wrong?
Mercurial Senator Dino Melaye and quiet Senator Abiodun Olujimi had put their fingers on it during that heated exchange in the Senate on November 23, 2016.
Both of them wanted to know how the budget for 2017 can be written without a review of the 2016. It is the most vital step; as anyone who had been involved in preparing budgets know too well.
The Federal budget for 2017 has become a joke because it is standing on nothing. At least the Vice President and the Budget and Planning Minister should understand that. Where we are has a strong influence on where we can go.