Govt may face cash crunch, delay in salary payment 

AS the prices of crude oil continue to decline, there is anxiety over the impact of this development on the nation’s economy. 

   Global oil prices fell again Monday, amid worry about slow growth and reports that the Organisation of Petroleum Exporting Countries (OPEC) wants to maintain current output levels.

  Brent crude fell to a near four-year low of $87.74 a barrel earlier, before recovering some ground to $88.46.

  According to the Energy Information Administration (EIA), total production of crude oil and liquid fuels rose by 10 per cent in the last five years, from 83.3 million barrels per day (bpd) in early 2009 to 91 million bpd in mid-2014. 

  In recent years, demand has been losing strength. The United States, Europe and Japan have reduced their consumption of oil since 2008 by around 10 per cent or four million bpd, due to improvements in energy efficiency and low  Gross Domestic Product (GDP) growth.

  Economic experts believe that the continuous drop in the price of crude oil would affect Nigeria’s 2014 budget benchmark price of $77.50 per barrel.

  They believe that for an economy that is 95 per cent dependent on oil for its foreign exchange earnings, and 85 per cent dependent for revenue, this development should be a cause for concern.

  The experts say that the current trend with oil price poses major downside risks to some key macroeconomic variables and the general economic conditions.

  The Lagos Chamber of Commerce and Industry (LCCI), hinted that current drop in oil price would impact negatively on government fiscal operations, naira exchange rate, capital flow reversals, stock market, foreign reserves, inflation and interest rate.  

  Executive Director, African Heritage Institution (AfriHeritage), Dr. Ifediora Amobi, said: “To date, crude oil prices have dropped 15 per cent since 1st January 2014, and at a current price of less than $91.60 a barrel versus $115.70 a barrel on June 19, 2014, if this declining price trend continues, Nigeria’s 2014 budget benchmark price of $77.50 per barrel will become more and more jeopardised, thus having a serious effect on Nigeria’s short-term economic and fiscal growth.”

   In an interview with The Guardian yesterday, Amobi said that Nigeria’s revenue was over 90 per cent dependent on crude oil, adding that any disruption in the international market  would affect  the country  adversely, thus a 1.2 per cent drop in the price of crude oil decreases Nigeria’s foreign exchange earnings by 1.0 per cent. 

  He noted that shale gas technology was fast catching on, and in the near future, the country’s other major trading partners would follow suit. “This is a reality check because we have been paying lip service to diversifying the economy and have never achieved more than 10 per cent revenue from the non-oil sector in over 35 years.”

  He explained: “The global economy driven by the industrial countries of the west is now stabilising after the financial crisis of 2008. As a consequence, unemployment is falling and the risk of an imminent deflationary crisis has been reduced in the United States and parts of Europe and Asia. The current global economic cycle is moving into a phase in which simulative central bank policies, which were created in a desperate attempt to sustain the global economy and led to the crude oil price boom of the past four years, is being gradually reversed.”

  According to Amobi,  global oil demand  is diminishing as more countries are discovering oil and  alternative sources of energy.   

“Added to this decline in demand is the global weather forecast that is pointing towards a milder than normal winter in 2014. This is also not good for Nigeria because a mild winter means that less oil will be demanded for heating, and thus less demand for Nigeria’s crude in other parts of the world.

  “This problem will linger for a long time, because most OPEC nations are facing growing fiscal deficits, which prevent them  from  cutting  their oil production to bolster the price of oil like they used to in the past when oil prices dropped significantly. Today, a lot of them, including Nigeria can no longer afford the loss of oil revenues”, he added.

  On the implication of decline in crude oil price to different sectors of the economy, the Director-General, LCCI, Muda Yusuf, said that for an economy that is 95 per cent dependent on oil for its foreign exchange earnings; and 85 per cent dependent for revenue, this development should be a cause for concern.

   Yusuf said that the single most important vulnerability of the Nigerian economy is the heavy dependence on oil. 

  He stated: “The economy is 85 per cent dependent on oil revenue.  Declining oil price means reduction in revenue inflows.  This has implications for the capacity of government at all levels to meet their statutory obligations.  Most states are over 70 per cent dependent on statutory allocations   which make the impact of declining oil price very profound.  This is even more so when the culture of big and profligate spending has been entrenched.  Already, some states are having issues with the payment of the salaries of their workers.  Many have issues with payment to contractors. Major adjustments in government spending [at all levels] is clearly inevitable.  

  “Exchange rate is a price determined by forces of supply and demand.  The strongest factor on the supply side is the forex inflow from crude oil.  Therefore, a downward trend in oil price would naturally result in exchange rate depreciation.  Although the CBN has been struggling to defend the naira, this may not be sustainable if the slide in oil prices persists.

  “The Nigerian economy is estimated to be over 80” dependent on imports.  Exchange rate depreciation would mean new pressures on production and operating costs in the economy, which would generate new inflationary pressures.  High importation costs will also come with high import duty payment, port charges, VAT as all of these are computed as percentages of import value.”  

  Yusuf noted that the trend of oil  prices was a major driver of foreign capital flows, especially portfolio flows.  “This is because the prosperity of the Nigeria economy is perceived to be inextricably tied to the developments in the oil market, and rightly so. For portfolio investors, oil price and exchange rate conditions are major indicators that drive their investment decisions. The impact of such capital flow reversals is often profound in the stock market and the foreign exchange market.”

  He added: “There is a correlation between stock market performance and the fortunes of the oil market. The Nigerian stock market is well known to be more vibrant when oil prices are high.  A major factor in this is the profundity of foreign portfolio investors who currently accounts for about 60 per cent of the market.  Their sensitivity to oil price and exchange rate movements is very high.

  “Furthermore, declining oil price scenario would result in further tightening of monetary policy to preserve macroeconomic stability.  The result is high interest rates and superior returns on investments in the money market which could have negative impact on the stock market.”

  He noted that the declining oil price scenario would put pressure on foreign reserves. “Declining oil price scenario would reduce the accretion to reserves. Therefore there is a good chance that the reserves will come under pressure.  Besides, the customary disposition of the Central Bank of Nigeria (CBN)  to  defend the naira through increased supply of foreign exchange will take its toll on the robustness of the external reserves. This is even more so when the excess crude account has dried up.

  “The likely CBN response to the current scenario is to intensify the tightening of monetary policy.  This will further push up interest rates, increase cost of funds to investors in the economy and constrain the access of the banks to investible funds.  All this would impact negatively on the bottom line of enterprises in the economy.

  “The good news in all of this is the likely moderation of cost of fuel importation.  This is well known to be a major burden on the finances of the country.  The share of the nation’s resources committed to fuel importation and fuel subsidy is horrendous and perhaps scandalous.  It is hoped that declining oil price would moderate this cost.”
Source: http://www.ngrguardiannews.com/lead-story/182879-anxiety-over-decline-in-crude-oil-prices

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Nothing to worry about.

How is $98 a decline when 2014 budget was based on $78 per barrel, we still have $20 excess crude surplus per litre to account for.

What Nigeria's problem has been of recent is “who to buy and never the price to sell".