Price hovers 20% above budget benchmark
By Nkiruka Nnorom
There are indications that the Federal Government may be on course to meet and perhaps, surpass the projected oil revenue target in the 2021 budget if the recent rise in the prices of crude oil is sustained into the new year.
Investment analysts observed that besides meeting the oil revenue target, Nigeria also stands the chance of reducing the budget deficit estimated at N5.2 trillion and government’s borrowing to fund the budget if the ongoing surge in the international oil price is sustained for the rest of 2021.
The prices of Brent Crude surged above $50 per barrel last week (20% above the budget benchmark) following optimism that the global Gross Domestic Product (GDP) is recovering from the Covid-19 pandemic on the back of vaccine discovery and hope of distribution and also reflects the ability of the Organization of the Petroleum Exporting Countries (OPEC) plus Russia (OPEC+) to enforce some level of collective production cuts.
Meanwhile, the federal government has estimated that revenue from oil sales would contribute not less than 25.5 percent to its 2021 revenue target after setting oil revenue projection at N2.01 trillion.
Following the projections, the federal government had also set oil price benchmark at $40 per barrel, while daily oil production is benchmarked at 1.86 million barrels per day.
Vanguard Public Finance analysis shows that collections from oil revenue for third quarter ended September 30, 2020(Q3’20) stood at N953.09 billion, N1.06 trillion or 52 percent and 63.9 percent short of the 2020 and 2021oil revenue targets respectively.
Despite the shortfall, investment analysts have said that the FG may still attain the target but stated that realisation of the target would also depend on maintaining the oil production target throughout the year.
Further breakdown showed that collections from oil revenue in Q3’20 was 25 percent and 28.9 percent lower than receipts in Q2’20 and Q3’19, respectively, but represented a 7.6 percent increase above the revised benchmark of N886.16 billion for the period.
Financial experts who spoke to Vanguard Public Finance explained that global oil price above US$50 would enable the country achieve the oil revenue target and would lead to improved dollars inflow into the country.
Victor Chiazor, Head of Research, FSL Securities, said: “The rise in crude oil prices remain positive to the Nigerian economy. Given the 2021 oil benchmark price of US$40.00 per barrel, a global price above US$50 per barrel will effectively enable Nigeria achieve its oil revenue budget once our oil production volumes are not affected during the period.
“A higher oil price for the fiscal 2021 period will also help reduce the budget deficit and reduce government borrowing needed to fund the 2021 budget.”
He, however, said that the government needs to focus on revenue sources to cushion the impact on any unforeseeable occurrences in the oil market that may negatively affect the revenue target.
He said: “We, however, need to remain cautious with regards to oil prices remaining above the US$40 budget benchmark for the entire fiscal year 2021, as there remains significant headwinds which may drive oil prices lower in the short term and therefore we need to focus on other revenue sources for the federal government outside of crude oil.”
Corroborating him , Ayodeji, Ebo, Senior Economist/Head, Research & Strategy, Greenwich Merchant Bank, said: “The uptrend in crude oil prices is positive for Nigeria given the high dependence on oil revenue and historical shortfall in non-oil revenue. With the oil price above the budget benchmark, the government should be able to meet up with its projected revenue from oil,
“However, the downside risk is the OPEC + production cut which is significantly lower than 2021 budget projection. Recall that the excess above the budget oil price benchmark is kept in the Excess Crude Account which is the savings for the raining day. To avoid continuous revenue vulnerability to crude oil prices, there must be increasing effort towards improving the non-oil revenue target.”
In their own views, analysts at Coronation Merchant Bank, said: “As a rule of thumb, Nigeria’s public finances work well when oil trades consistently above US$50 per barrel. Oil provides (in a good year), the federal government with upwards of 60 percent of its revenue and supplies the country with over 80 percent of its export earnings. Since much of these earnings are banked by the Nigerian National Petroleum Corporation (NNPC) with the Central Bank of Nigeria (CBN), this is a crucial source of foreign exchange (FX). So, for example, the long period of low oil prices from the end of 2014 through to mid-2017 (the price of Brent averaged US$45.10/bbl in 2015 and US$56.09/bbl in 2017) led to a depressed level of CBN FX reserves. This precipitated two devaluations in the interbank exchange rate, from N199/US$1 to N316/US$1 in mid-2016 and from N316/US$1 to N357/US$1 in August 2017.
“Therefore, the recent rise in the price of Brent comes at a good time for the CBN. This year the CBN has avoided the fate it suffered in 2016 and the first half of 2017, namely a level of reserves below US$30.00bn (the current reported level is US$34.97bn). The cost of this preservation has been a sharp reduction, starting in March, in the CBN’s supply of US dollars to the NAFEX market.
“If an oil price above US$50 per barrel takes root in 2021, it will be tempting to think of the nation returning to normal. Normal, in this instance, means a healthy inflow of US dollars from oil that supports the revenues of the government and allows the CBN to be supplier of last resort to the foreign exchange markets.
“Therefore, an oil price above US$50 per barrel brings the prospect of improved US dollar inflows.”