28 December 2015, Lagos – With the sustained slide in crude oil prices due to glut of oil on international market, experts have warned that Nigeria must prepare for a less than $20 oil price scenario.
The warnings are coming on the heels of the new projection contained in the “IMF Executive Board Concludes 2015 Article IV Consultation with Iran” report released last week, which predicted that the price of crude oil could drop between $5 and $15 in 2016 owing to the prospective lifting of economic sanctions on Iran and the capacity of the Middle East oil producing country to roll out one million barrels of crude daily.
Prices of Organisation of Petroleum Exporting Countries, OPEC, benchmark crude oil have fallen about 50 percent since the organization declined to cut production at a 2014 meeting in Vienna from a price as high as $110 to slightly lower than $38 at the weekend.
However, analysts who described the IMF projection as the worst case scenario, said the fact that Nigeria had benchmarked its crude oil price at $38 per barrel in 2016 budget had put the country in a tight corner.
They added that the President Muhammadu Buhari administration must be prepared for a scenario that could see oil sell for less than $20.
Director General, Lagos Chamber of Commerce and Industry, Mr Muda Yusuf, explained that “If price of oil goes as low as $20 per barrel in the global oil market as predicted, then the impact on the Nigerian economy will be very challenging considering that the budget proposal for next year has benchmarked oil price at $38 per barrel. Current trend analysis require that government do some adjustments.
“Government may be tempted to borrow more, but borrowing is not a sustainable option; we already have a record high deficit at 2.2 trillion while debt servicing is taking as much as N1.3 trillion which is about 35 percent of revenue. Deficit is bound to go up with more borrowing. We are almost at our limit already.
“A more sustainable option is for government to come up with economic policies that will attract private funding in various sector. Quality of economic policy is very critical at this time to attract private investments so that private investors can take up funding of key projects in various sectors, especially in the infrastructure sector,” he said.
Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane, in an interview disclosed that at $20 per barrel, it means Nigeria will no longer have margin on oil export, explaining however that there are other options available to the Federal Government to stay afloat.
He said that at $20 per barrel, many oil producing nations would go out of business, adding however, that last week pronouncement of the Federal Government to scrap fuel subsidy regime came at a right time.
He said government would have to tighten its belts further. According to Rewane, Nigeria is currently in an underwater situation, saying there is no cause for alarm as long as the country doesn’t stay in the same position for long.
According to a director with BGL PLC, Mr. Olufemi Ademola, “There are a few options available to the government but each with some not too pleasant consequences. The government could borrow to cover the gap from the potential oil revenue loss.
This would increase the fiscal deficit to above 2.16 per cent of GDP and the debt profile to more than 14 per cent of GDP. Although we have capacity for additional borrowing, it could have macroeconomic implication if the debt profile increases sharply just in one year. Should the government choose this option, it must be ready to deal with the consequent rise in inflation and exchange rate volatility.”
Explaining further, Ademola said another option is to aggressively pursue non-oil revenue drive such as taxes, levies and duties. While this would seem like an attractive alternative, it also has the tendency of being seen as anti-investment and anti-business as government taxes and levies reduces investment returns.
The analyst added that government could focus on cost cutting by reducing governance costs, which also may lead to cuts in salaries or staff rationalisation.
In his opinion, CEO, Excellon Capital, Diekola Onaolapo, said the key impact point for Nigeria should the IMF scenario play out would be a further downward pressure on government’s oil revenue by c.47.0 per cent. This, according to him, would invariably force the government to either squeeze further income from non-oil sources, or increase its borrowing targets for 2016 to fund the budget.
This implies that the budget deficit would expand from the projected N2.22 trillion to about N2.59 trillion in 2016, which would in turn alter the capital – recurrent split of the budget to some extent as more provision would be made for debt servicing. He said the development also has the potential of crowding out private sector borrowings in the country as the government has already hinted of borrowing more funds from the domestic market visa-a-vis foreign markets to fund the 2016 budget deficit.
Another fallout of the scenario, according to him, is the fact that the benchmark price for the budget would be a heated debate in the National Assembly when deliberations on the budget start. This is due to the fact that oil prices are currently below the US $38/barrel benchmark used in computing the budget.
“However, going by the precedence of the current National Assembly in the last six months, the debate is likely to go along party lines which could see the party with the majority having their way in favour of the Executive arm of government,” he said.
Diekola warned that to avert a possible budget crisis, “the government would have to take some tough decisions. These, according to him, include the need to enhance overall efficiency of government and reduce leakages to the barest minimum. This would entail doing away with subsidies on petroleum products; ensure the nation’s borders are properly policed to increase the revenue generating capacity of the Nigeria Custom Service, NCS, as well as expand the current tax bracket in the economy to boost non-oil income for the government. Some of these measures are already being implemented gradually, which is a positive sign for the economy.
“On the benchmark oil price, the government could explore the possibility of locking down the price of the Nigerian crude for the better part of 2016 to insulate the budget from price volatility in the international oil market.”
In his calculation, Ademola said by inference from the budget, it costs Nigeria about US$30 to produce one barrel of oil, hence the expectation of only N820 billion from oil revenue (at a net revenue of between US$8 and US$9 per barrel). Therefore, an average oil price of below US$30 is not economically feasible for the country and could be fiscally damaging as not only would it wipe out the projected N820 billion oil revenue, the government might also need to use revenue from other sources to cover the shortfall.
However, in spite of this, the BGL official cautioned the National Assembly against taking hasty decisions, saying, “The National Assembly would most likely adjust the oil price benchmark but they need to be well informed before taking any decision. Increasing or lowering the benchmark should be based on properly determined and defensible oil price projections.
“While the IMF is an authority to be quoted, it should be noted that even their projections follow market realities, which can change at any time. In August 2015, IMF’s crude oil forecast for 2016 was US$50.40. By November 30, it was US$45.50 while on December 10, it went further down to US$42. Now based on the reality, IMF is forecasting something significantly lower. What this means is that if by January, any kind of shock drives oil prices higher, the forecast would change and most likely higher.”
According to IMF predictions, the bottom of the oil slide hasn’t yet been reached due to the fact that additional supply from Iran is still waiting on the sidelines. Iran – which is OPEC’s 2nd largest oil exporter, and 4th largest producer in the world – is waiting for the United Nations nuclear activity-monitoring period to elapse, and for the sanctions to be lifted, before unleashing its oil into the already flooded market.
It is estimated that Iran could increase its output by one million barrels per day, even as the global market is already oversupplied by up to two million barrels a day.
The IMF believes that this will result in the downward pressure of oil prices. Potentially prices might still fall by between $5 and $15 a barrel from the current price level.
Additionally, there are concerns about the USA lifting a ban on the exports of its oil, adding to the global supply, which is continuing to outstrip demand.
*Festus Akanbi – Thisday