30 November 2014, Lagos – This report examines the duplicitous complicity of handlers of Nigeria’s economy in the emerging economic crisis occasioned by the fall in the price of crude oil. It then concludes that Nigerian must prepare for a long night of hardship because some of the measures being put in place to restore confidence would come with much pain and less gain
“ Procrastination is the grave in which opportunity is buried.” Brewer Stock, VANGUARD BOOK p 202.
EARLY WARNING SIGNS
An accident is what happens unexpectedly; a disaster foretold and without those likely to be the victims taking preemptive steps to mitigate the impacts of the unavoidable turn of events is totally indefensible. Finance Minister Ngozi Okonjo-Iweala was correct when she said she was not responsible for the devaluation of the Naira. That the devaluation would have happened irrespective of what was done and when. Her role in what will follow from now can be characterised as benign neglect of her duties as the nation’s chief fiscal policy manager and procrastination; the latter for political reasons.
All the signs were there, that crude oil as foreign exchange earner, for Nigeria, was already on its way out – just as copper’s decline spelt doom for Zambia in the 1980s. The Age of Silicon brought to an end the Age of Copper and Chile,as well as Zambia as both countries found their economies in turmoil. For Nigeria, the Age of Oil is coming to an end and the sooner we faced that reality the better for us. Instead of the bold and radical departure required, the Federal Government had been operating as if this is just another cyclical downturn for crude – after which it would bounce back and return to $110 per barrel. Nothing could be further from the truth. Let us examine the evidence.
Four major developments account for this transformation. They are:
• Loss of best customer, The United States of America, US, which also morphed into a competitor
• Intensified competition; loss of market share
• Slowing global economy
• Domestic economic terrorism
At one point the US was buying close to one third of our global crude oil export. The loss of that market was not only devastating by itself, no other country could take up the same volume – not even India. More catastrophic still, the US became an oil exporting country. In plain language, it became a competitor – but one with a mission. And that mission is to dominate the global oil trade. A look at the long term plans of the US companies, now exporting finished and crude petroleum products, would convince any doubters about their intention to be in the market for as long as possible. That cannot be less than a generation – defined as 30 years. So we are faced with a long term problem – totally unprepared.
The US, however, is not the only competitor we have to contend with. Oil, apparently, is more widely distributed than previously assumed. In Africa, Ghana and Angola, not oil producers, even as late as 2000, are now oil producers. Angola, meanwhile, has overtaken Nigeria in crude oil output. Intensified competition, at a time global demand dips, will certainly further depress prices. Things will get worse before they get better – if ever there is a return to the good old days.
Slower global economic growth, with the exception of the US, which is experiencing robust growth, is already reducing aggregate demand for crude worldwide. Unfortunately, crude suppliers are behaving exactly the way any oligopoly – a market characterised by few producers who know what each is doing – each nation is cutting price in order to retain its share of the universal market. Too many of the countries have survived on crude and they have no ready substitute for it in their financial plans. Crude oil has become the opium of the oil producers. Weaning them, including Nigeria, from it would be as difficult as getting drug addicts to kick the habit.
While all the oil producers have most of the same problems, Nigeria has one that is uniquely its own – economic terrorism. Some of its features include oil theft, deliberate and inadvertent damage to pipelines, under-cutting of official selling prices and denial of revenue to the country – including tax evasion. Several syndicates have become established for all of these. And because appetite grows with eating, they want more – even if the nation receives less. It will amount to grand illusion to expect they will curtail their activities – now that Nigeria needs more revenue.
WHAT GOVERNMENTS SHOULD HAVE DONE
The federal and state governments, acting through the Council of State, should have approved a global study to assess the enormity of the threats to our crude oil sales. The most noticeable thing is the absence of joint responsibility to examine the dangers developing worldwide and which had combined to bring us now to the brink of economic catastrophe. One former governor of an oil producing state, in the Niger Delta, suspecting that tankers were being overloaded, hired detectives to track a shipment of crude to Europe. His worst fears were confirmed. The shipment declared in Nigeria was less than the volume in the European terminal – where governments don’t condone corruption.
More importantly, the President, the governors, the federal and state legislatures should have collectively downsized long ago. The presidential system is inherently very expensive – even when there is a great deal of transparency and accountability. Where corruption is high, it becomes totally ruinous.
Here again, the Federal Government should have led by example. President Goodluck Jonathan set up the Danjuma Committee to advise on what to do earlier on. Another committee was established to appraise the public service. Both recommended downsizing. Nigeria with a population of 170 million operates with 44 Ministers and uncountable Advisers; China, with 1.2 billion people and larger landmass and GDP is managed by less than 20 Ministers. The difference is clear.
Tax evasion among the wealthy, collecting close to 90 per cent of income, duty waivers granted to some of the same tax evaders and politisation of the Asset Management Corporation of Nigeria, AMCON, have ensured that optimum revenue collection evades the country.
Finally, import restriction should have been imposed at least a year ago. Who, in Nigeria, actually needs fruits, toothpicks and eggs on which we spend billions of dollars?
WORSE TO COME
The devaluation of the currency, just announced, certainly too late, will bring with it the same set of hardships associated with it. Devaluation ordinarily makes imports more expensive while promoting exports. But, it only works if the nation has a basket of exportable products. Where there is no demonstrable surplus of any product to export and the nation is import dependent, devaluation visits all the pains without any gains to compensate.
Among the pains are inflation (higher prices), reduced aggregate demand; declining capacity, factory closures, bad debts and more unemployment. Nothing done by government will avert all these.
Granted, devaluation will increase the Naira supply to government, helping them to pay salaries, but the pervasive price increases will nullify any benefits to public servants. Pensioners, the unemployed and those on fixed income will find their purchasing power reduced considerably.
Banks face more bad debts or non-performing loans and they too will be forced to retrench workers.
BELATED AUSTERITY MEASURES
The series of measures rolled out by the Minister of Finance, two weeks ago, cannot possibly solve the deep problems adequately. Procrastination has robbed them of any value they might have had. It is unfortunate, for the Jonathan administration and Okonjo-Iweala, that events beyond their control are shaping the future of our economy. The Minister, like most professional and seasoned economists, knows that these measures should have been taken several months ago. But, the consequences of those policy initiatives would have negatively affected the President’s re-election bid. Even the Central Bank, which reluctantly devalued the currency, last week, knew that it should have acted long before currency speculators started to target the Naira for attack. The official devaluation of the currency has merely reduced the rate at which the Naira is going down. At the parallel market, it is sold at N183/$1 instead of N168. Chances are, it will go down more.
It is understandable that the newly appointed CBN Governor Godwin Emefiele bent over backwards ro continue to accommodate the Federal Government whose fiscal policies were wrecking the economy. The CBN adopted a wait and see attitude, while the external reserves rapidly declined. Last week, Emefiele, wisely, decided he could wait no longer – because he had seen enough. There is a slight rebuke in that step for the Finance Minister.
ONCE UPON A COUNTRY
As usual, Nigeria is going through the same process of managing a rapid rise or fall in the price of crude oil. From the first sudden rise in 1973, which ended with Shagari in 1982, to the slow down from 1982 till Abacha’s government in 1998, when it started rising again, every government had promised to promote diversification of the economy to reduce our dependence on the commodity. None had fulfilled that promise. Every upturn in the price of crude had resulted in policy somersault. Like all addicts, governments quickly return to their profligate habits, forget policy options embraced when price of crude was low and go on a spending spree. The Babangida administration introduced the Structural Adjustment Programme, SAP, when crude was under $10 per barrel. It lavished N40 billion (equivalent of N2.4 trillion today) on the election which was annulled after June 12, 1993. Till today, nobody knows precisely what happened to the $13-$16bn which former President Olusegun Obasanjo spent on power. That was less money than South Africa spent to increase power supply by 8,000MW.
This government came into office making the familiar promises, which are becoming like biscuits – made to be broken. Nothing of significance has occurred. So, it is not surprising that the current downturn in the price of crude oil leaves us on familiar spot.
The list of missed opportunities is almost endless.
EFFECT ON GOVERNMENTS
The Excess Crude Account, ECA, and the external reserves, which had been used to shield the three tiers of government from reality, are getting depleted. Very soon, government, all over the country, will face the stark reality that they cannot adequately fund their budget for the balance of this year. Furthermore, those who already sent their 2015 budgets to the legislators will have to recall them for urgent review.
The truth is, this is not going to be a short-term downturn. It will last quite a while and there is nothing in the austerity measures recently announced to prevent major financial problems nationwide.
IMPACT ON NIGERIANS
The wealthy will probably weather the storm better than others. Some might even get richer. But, for the vast majority of Nigerians, 2015 is a year to dread. It will be the first of several years of additional hardship.
Only God knows when the end will come.
– See more at: http://www.vanguardngr.com/2014/11/nigeria-brink-economic-doom-catastrophe-foretold/#sthash.OCZCLkTG.dpuf