Is the economy ‘stupid’? It’s swimming in troubled oil prices

For over a year now, Nigeria’s economic skies have given nothing to cheer about. Everywhere you look, the storm clouds are emptying themselves on the economy. Certainly, this year’s budget which is premised on USD53 oil benchmark is imperiled. Perhaps the same for any fiscal plan that the Buhari administration may have in mind. The prediction is unmistakably straight forward: look forward to a difficult and uncertain days.
The reason for this latest grim economic outlook is pretty clear: concerns over the continuing decline in oil prices have delivered a heavy blow on the economy as international price of crude oil at the weekend hit a six-year low at USD39.89 per barrel. This is a massive $13.11 below the 2015 budget benchmark. Nigeria’s Bonny Light which is similar to the Brent crude also declined to $45.10 per barrel, $3.77 lower than the previous week’s level of $48.87 per barrel.
With volatility in the international oil market expected to continue, you can smell trouble for Nigerian economy. The cash crunch and liquidity flow that set in over a year ago could spell further trouble for all tiers of government which are still reeling and riling from insolvency that necessitated Federal Government’s bailout for the states few months ago.
All of these hold unpleasant, far reaching implications for President Buhari, whose inability to unfold his economic agenda may have put investors in a quandary. When you recall that the 2015 Federal Budget was expected to net in about N3.6 trn of oil revenue component at $65 per barrel, with a projected production output of 2 million bpd, the estimated revenue of N3.6 trn is certainly a tall order now. What all of this means is that at current oil price of below $40 per barrel, government’s projected revenue will drop to more than N2.5 trn. What does it foretell for the economy? A huge mess. What does one make of these developments that have popped up in recent months, in particular, the unrelenting oil price crash? What options for President Buhari? This is a problem his government inherited from the Jonathan administration. It has now become a hug burden that will certainly affect the direction of his ‘change’ agenda. This is what happens when a government in power fails to take concrete actions to predict the future markets based on projections. Much earlier before the oil prices began to tumble, Nigeria was warned by financial institutions, including the World Bank and the International Monetary Fund (IMF) to take urgent action towards diversifying non-oil sectors of the economy. That warning was not heeded. Inaction is the riskiest response to the uncertainties of any economic crisis. Disorganised response is even worse, as it can generate a sense of panic. And now, government at all levels are pushing the panic buttons.
This is dangerous. And that is where Nigeria is right now. Last year, report on Nigeria by the IMF showed that total oil revenue received by the Federal government, including cash calls and royalties decreased from $45 bn to $32.3bn between 2011 and 2014. Within this period (2011 – 2014), oil lifting reportedly fell from 2.38 to 2.19mbpd.  From the second quarter of 2014, oil revenue from N912 bn to N864 bn. This was as a result of oil theft, pipeline vandalism and falling oil prices. We all know that oil revenue accounts for about 70 percent of Nigeria’s total revenue. Now, that projection has fallen by over 8 percent of the Gross Domestic Product (GDP).
There is now a genuine concern that things may worsen even further. But this is one of the lessons of unheeded advice. We need to remind ourselves that after the 2008 global financial meltdown, there was this emerging market check-list which nations, especially emerging economies  such as Nigeria were advised to adhere to. These include: don’t let your current account deficit get too big, preferably not above 3 percent of GDP. Secondly, don’t finance your deficit budget with short-term portfolio capital. Instead, attract long-term foreign Direct Investment (FDI). Thirdly, don’t  let your exchange rate get overvalued. Grow your external reserves and keep inflation rate at a manageable level, not above 6 percent. Sadly, Nigeria is reportedly to have broken all these rules.
With oil production figures and prices coming far short of budget  assumptions, what can President Buhari do? One thoughtful option is a comprehensive economic framework that will de-emphasis dependency on oil as the mainstay of the economy. But, with no economic blueprint 88 days into his presidency, we can only give the President the benefit of the doubt that he will come up with a realistic economic agenda next month when he has promised to unveil his cabinet.
Whatever the president comes up with to deal with the sinking economy, it bears repeating that diversification of the economy, with special attention to non-oil sector such as agriculture, solid minerals, tourism and a prudent management of resources, could be the solutions to the uncertain days ahead. Altogether, if Buhari delivers on the economy, it takes an optimist to conclude that he could as well deliver on other promises, including ant-corruption war which he has made his focal point.

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