28 November 2018

Nigeria: Low Oil Price Threatens Nigeria Budget, Revenue

Photo: This Day
Barrels of oil.

The continuing meltdown in the global oil market in the last one month is threatening Nigeria's budget implementation, especially funding of capital projects, experts told Daily Trust yesterday.

International oil benchmark Brent, against which Nigeria's oil is priced, plunged to $51 per barrel at the weekend after hitting four-year high of $86.74 per barrel early last month.

"The sheer scale of the move is triggering unpleasant memories of 2014 and 2015," said Michael Tran, director of global energy strategy at RBC Capital Markets, alluding to the last oil downturn.

The price decline, which was below the proposed $60 per barrel benchmark for the 2019 budget, has sparked fresh wave of concerns on the implication to the federal government's economic projections for 2019.

Although oil held onto a second day of gains rising up to $59.29 yesterday, focus has shifted to whether Organisation of Petroleum Exporting Countries (OPEC) and its partners will cut supplies enough to check fears of a looming surplus of crude when it meets next week.

But some analysts said the price may go down further as winter cold surges.

Financial experts said authorities should be worried over the threat the fall in price poses to the successful implementation of 2018 budget and even that of 2019, and overall revenue of the government.

The Federal Executive Council (FEC) had last month approved the proposal of N8.73tn for the 2019 budget, and pegged the price of crude oil at $60 per barrel, up from $50.5 for the 2018 budget.

There's no cause for alarm - NNPC

However, the Nigerian National Petroleum Corporation's spokesman Ndu Ughamadu said there was no cause for alarm.

"Oil prices are externally determined by the forces of demand and supply and all these are factored in our crude production and marketing. So, it is nothing strange," he said.

The Head, Investor Relations at United Bank for Africa (UBA) Mr. Abiola Razaq said the price decline would have no impact on the budget either from a funding perspective or perception perspective.

"It is already threatening the budget benchmark and overall revenue of the government for 2019. There's also an implication for the naira because oil receipt remains the major source of our foreign currency supply as a nation meaning that a lower oil price has negative implications for the overall FOREX supply to the country. That also has implications for the ability of the central bank to meet FX demands," he said.

He said this period presents a golden opportunity for the government to develop alternative revenue sources.

"We need to further diversify the economy away from oil and it goes beyond a statement. We need actions; the government needs to create avenues for more economic activities to happen like diversifying the tax revenue of the government beyond oil. You can't expect to generate more non-oil tax without having an increase in the economic activity," he added.

OPEC meets next week in Vienna and analysts and traders have predicted that the meeting will produce an output cut to shore up prices, but the expectation is not providing much relief now.

"There is an expectation OPEC may have a rethink and if we have another OPEC deal like we had about two years ago that may also help to stem the decline in oil price," Razaq said.

Why oil price is falling

Under pressure from US President Donald Trump, Saudi Arabia ramped up production to an all-time high early this month.

That's critical because Saudi Arabia is the world's largest exporter and the only country with the ability to significantly ramp up output. Russia and the United States also accelerated production, according to a CNN report.

But the Trump administration shocked the oil market earlier this month by taking a softer approach on Iran. Temporary waivers were granted, allowing India, China and other countries to keep buying crude from Iran.

The Iran arrangement left the oil market suddenly facing a potential supply glut. OPEC is now under pressure to significantly cut output in Vienna to help put a floor beneath the market.

'Foreign reserves, capital projects to be affected'

An expert in financial economics has said that the current fall in the international price of crude oil will have adverse effect on the economy, including the possibility of a reduction in the country's foreign reserves and execution of capital projects.

Speaking to Daily Trust yesterday, an associate Professor of Financial Economics at the University of Abuja, Dr. Mohammed Yelwa, said if the oil crude price falls below the 2018 oil benchmark of $51 dollar per barrel, then the federal government will have to prioritise capital projects.

He said the government needs to show clear fiscal discipline by cutting down costs and executing projects that will impact the economy positively.

The don called for financial prudence by the National Assembly members to save to make up for the possible shortfall in the budget as a result of plunging oil price in the international market.

We are monitoring fluctuations - Minister

The Special Adviser, Media and Communications, Minister of Finance, Mr. Paul Ella Abechi told our correspondent on the phone that the ministry is monitoring the oil prices and will take a decision based on the trend.

"We noticed that prices dropped. There is volatility in the system. We noted what Trump is doing with the Saudis but is it going to be a sustainable thing? We don't know", he said.

He added: "We are monitoring the issues very carefully but we base our budgets on trends over a long period. We also follow World Energy Outlook (WEO). When we do fiscal strategy paper, we look at what World Bank, WEO, and OPEC put out as expected trend."

He observed that for next year, the World Bank had projected $55 per barrel but that's being conservative.

"But let us see what happens. If in three weeks' time and the oil prices continue to drop, these agencies will come up with a new forecast which is what will guide us, too", he noted.

"If you look at the trend under Trump, you will notice spikes. He seems to like volatility. However even within the volatility there is a trend which we will continue to monitor to recalibrate or consider it a short term thing," he also said.

Why FG should be serious about diversification - Expert

A Professor of Capital Market at the Nasarawa State University Keffi Prof. Uche Uwaleke told Daily Trust that the drop in oil prices gives cause for worry and that is because of Nigeria's overreliance on oil.

According to him, if Nigeria's economy was more diversified, it won't be this pressured with oil volatility at the international market.

However, he proffered that going forward, especially in 2019, the government should scale down its expenditure on both recurrent and capital projects.

According to him, government should scale down hugely overheads and also seek ways to finance some of its infrastructure projects through private sector investments through Public Private Partnerships (PPP).

While tasking the government to be serious about economic diversification, he warned against further borrowing to finance the budget.

Prof. Uwaleke also advised the federal government to speed up the privatisation of moribund federal assets and use the funds to fund the budget.

He also said the drop in oil prices shouldn't affect negotiations on the minimum wage.

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