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Crude oil threatens budget, ERGP and Nigeria’s future

By Dele Sobowale

“Nigeria loses as US oil attracts more buyers.” PUNCH, March 30, 2017.

IT was not only PUNCH which carried the story on that day. The GUARDIAN also ran a story on what should have been headlines news of the day. It was instead tucked into the middle pages by the few papers which saw its significance. That was a pity because no news item deserved more prominence; not even the self-induced and mutually destructive feud between the Presidency and lawmakers.

Legend has it that Emperor Nero, AD 37-68, fiddled while Rome was burning under the attack of the barbarians. Historians of the future might also be writing about a President and lawmakers who indulged in a selfish power struggle at a time when crude oil, hitherto the mainstay of our economy was getting set to finally let the country down totally.

Consider the news first. The three biggest economies and three of our biggest customers – US, China and Japan – have sharply reduced their demand for Nigerian crude. The US, in particular, had turned from being the largest consumer of Nigerian crude to becoming the biggest threat to our markets in Canada, Europe and Asia. India which once promised to buy more Nigerian crude and even broached the idea of a crude for dollars swap is also now cooling off on the idea because, the existing price of crude oil is expected to decline despite the steps taken by the Organisation of Petroleum Exporting Countries, OPEC, to reduce global supplies.

That is not all. Crude prices which climbed to over  $55  per barrel early in the year have started spiraling downwards and might go below the  $44  per barrel used for this year’s budget estimates. Unfortunately, the quantity estimates of 2.2 million barrels per day now increasingly appear as unattainable in 2017. Already, according to OPEC records which are more reliable than Nigeria’s, January and February exports from Nigeria were 1.533mpd and 1.526mpd respectively.

The report, released in mid-March estimated that March exports will not be significantly different from the previous two months. Thus, in the first quarter of 2017 the country will experience a 30 per cent shortfall in exports – the negative variance in revenue would be reduced by the positive price difference.

However, it appears that the positive price difference is about to disappear while our market share shrinks further. The cumulative impact of reduced prices and volume exports, this year and subsequent years will savage the current year’s budget, render the Medium Term Expenditure Framework, MTEF, projections misleading and all but scrap the Economic Recovery and Growth Programme, ERGP just released. Obviously, even with the best implementation strategies in the world, budgets and projections based on crude exports ranging from 2.2m to 2.5m per day would have become mere paper estimates when the actual exports average 30 per cent less over the periods of the plans – 2017 to 2020.

The dynamic global trends with respect to crude oil, which started under former President Obama and are now being more aggressively pursued by Donald Trump aim to punish oil producing countries and unleash America’s vast oil potentials on the world. OPEC, once in the driver’s seat with regard to global crude supply and prices is increasingly becoming irrelevant.

The accord reached late last year to reduce OPEC supplies was intended to shore up crude prices which had hovered around  $40  per barrel and hurting the economies of the producers. Predictably, the prices raced up to over  $50  per barrel. Then, unintended consequences took over. Driving the price of crude up made it possible for US shale oil and marginal producers to get back in the market.

The result is the glut threatening everyone — Nigeria especially which is the most vulnerable producer in the world. Diversification, often preached by governments and leaders, but, often ignored by the same leaders remains a pipe dream and will certainly not occur sufficiently between now and 2020 to save our economy from further distress if the turmoil in the global crude market continues.

A responsible government, if there is one in place, should now order its Economic Management Team, EMT, to start preparing for the likely possibility that the revenue projections from crude oil might not be met in 2017, just as they were missed in 2016.

That will create a huge unplanned deficit which will call for major adjustments. As it is, the existing 2017 budget and those for 2018 to 2020 depend heavily on debt financing. Persistent revenue shortfalls induce more borrowing which increases the debt burden and debt servicing costs. Unfortunately, the world does not have infinitely elastic patience for nations whose leaders cannot be pro-active by first projecting from the present to the future and taking appropriate steps to solve problems before they arise.

At the moment, all our political leaders are totally absorbed in the needless and destructive conflict between the Executive and Legislators.   Nobody is minding the store. The Presidency and the EMT are apparently not focusing on the dangers ahead – dangers which could render the 2017 Budget, the MTEF and the ERGP totally useless. When the repercussions become clear, it will be too late for remedy this year and perhaps 2018 and the years beyond as well.

Is this any way to run a government?



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