Oil price and getting the economy back to work

Eze Onyekpere

Nigeria is at the crossroad once again. The price of crude oil which is the mainstay of our economy has plummeted. Oil provides over 60 per cent of our revenues as well as over 85 per cent of the foreign exchange receipts. While the 2020 federal budget was based on the benchmark price of $57 per barrel of crude oil, the commodity now sells for about $33. This scenario applies to state and local government budgets because the benchmark price was used in the preparation of the medium-term expenditure framework which defined the revenues accruable to the federation account to be shared by the three tiers of government. Many states and local governments depend on federation account allocations for their economic survival.

Reduced oil revenue will play a negative role in the realization of non-oil revenue to the extent that oil revenue is required for imports of raw materials to power firms in the non-oil sector. Again, low oil revenue is a very sad news for our ability to pay back our debts. Currently, Nigeria is servicing debts with over 53 per cent of her earned revenue. The collapse of oil price will increase the percentage to not less than 65 per cent of earned revenue. And this is coming at a time we have heavily borrowed in foreign currency and the Senate had just given the nod for extra $22.9bn in new foreign borrowing.

The low price of crude oil did not come to Nigeria as a surprise. We have been through several boom burst cycles where the price of crude oil skyrocketed and we went on a spending and mismanagement binge and thereafter, started crying like babies when the price collapsed. We were at this economic junction in the early eighties of austerity measures through the low oil price of the nineties. Again, the global economic crisis of 2008 brought us to this same point. The oil price slump was a war long declared and could not have met a crippled person suddenly. Evidently, the major feature of Nigeria’s economic governance is the failure to draw lessons and make previous unfortunate events, opportunities and springboards for progress and development. We have refused to learn and therefore stagnated from the seventies to the present day.

The Excess Crude Account was created under S.35 of the Fiscal Responsibility Act to draw lessons from the past and to break the boom burst cycle of spending crude oil money. This fact is contrary to uninformed opinion which simply states that the Excess Crude Account is not backed by law. The section specifically provides that when the reference commodity price rises above the predetermined level, the resulting excess proceeds shall be saved in the Central Bank of Nigeria. No government in the federation shall have access to the savings unless the predetermined commodity price falls below the predetermined level for a period of three consecutive months and the withdrawal from the account shall be limited to such sums that will bring the revenue of government to the level contained in its budget estimates. Again, these clauses have been reproduced in all federal Appropriation Acts since 2007 when the FRA became law. However, every succeeding administration pretends that the law never existed. It was only the Obasanjo administration that obeyed the law and saved the proceeds of crude oil sales above the reference commodity price. A couple of days before the current oil price collapse, officials of the federal government were busy trying to explain how they dissipated the little accruals in the ECA – an explanation which failed to comply with the letter and spirit of the FRA. Also, there is the Sovereign Wealth Fund established by an Act of the National Assembly which defines how Nigeria can sustainably manage her crude oil wealth. But this law is also obeyed in the breach.

Now, how do we get out of this quagmire, especially to fund the 2020 federal budget. This discourse seeks to point out opportunities of revenue which can be tapped immediately. The starting point is the report of the Federal Auditor General for the years 2016 and 2017. If all outstanding sums due to the federal consolidated revenue fund and the federation account are recovered and utilized, the federal government will be able to fund the 2020 budget without borrowing.

Two examples will suffice; the Department of Petroleum Resources has an outstanding amount of $3.214billion in respect of royalty and rent. This money if recovered is N.157trillion at N360=1USD. Also, the $679.4million outstanding with the Bureau of Public Enterprises from the concession of Nigeria Ports Authority if recovered amounts to N244.58billion. There are several other infractions of this magnitude awaiting recovery.

This is the time for Nigeria to stop the petroleum subsidy fraud. Refined oil can come into Nigeria at less than the government defined pump price. Nigerians will enjoy the reduced price and when the price increases, it will be clear that government has no hand in fixing the price anymore. Hundreds of billions will be saved and channeled to more productive investments. This is also the time for government to encourage that Dangote Group to speed up construction of the fabled petroleum refinery so that we can totally stop the waste in importing refined petroleum and become an exporter of refined products. Further, it is widely reported by authoritative sources that Nigeria loses 400,000 barrels of crude oil every day. This needs to be stopped. At $30 per barrel, 400,000 barrels is $12million everyday and $4.38billion over 365 days. If the price of crude oil increases based on improved demand, the income would definitely be more than this sum.

Now is the time for high ranking executives and lawmakers to stop this madness of importing vehicles and other commodities that are produced or can be produced locally. To stave off another recession, local companies must be empowered through effective demand to increase production and thereby employ more Nigerians and have increased profits to pay corporate income tax to the treasury. The country needs to extend the incentives it is putting into agriculture into the automobile sector. But it must distinguish between actual production of vehicles and mere assembly of vehicles. The former needs more encouragement than the later. The border closure that has been on for several months needs to be carefully reconsidered and a permanent solution found to the smuggling challenge. Nigeria cannot afford to permanently close its borders as this is not beneficial to the nation’s economy over the medium to long term.

Finally, Nigeria as a nation must come to a decision to forget the crude oil resource and over the medium term, move on to production and value addition as the mainstay of its trading arrangements, especially to earn foreign currency. We must fix the glitches in the ECA and the Sovereign Wealth Fund going forward. Beyond the oil glut and the coronavirus challenge, virtually all developed countries have started implementing plans for a post fossil energy world. This may be a good opportunity to wake us up from our slumber.