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Bank chief predicts rebound in economy, backs end to subsidy

By Chijioke Nelson and Lucky Orioha
14 May 2015   |   4:23 am
THE nation’s economy may have been billed for economic rebound in the second half of the year boosted by a projected rise in the price of crude oil that would be averaging $76 per barrel.
Razia Khan,

Razia Khan,

THE nation’s economy may have been billed for economic rebound in the second half of the year boosted by a projected rise in the price of crude oil that would be averaging $76 per barrel.

The Managing Director and Head of Africa Macro, Global Research, Standard Chartered Bank, Razia Khan, made the observation during a media interactive session with journalist on Nigerian economy, with focus on possible measures the incoming government may adopt in tackling current economic challenges.

According to Khan, the indication is high that the price of the commodity in the international market would record an upward trend, with some overshooting in fiscal projections for Nigeria in the second half of the year.

“We see oil prices averaging $76 per barrel over the course of this year and we think that this means that by the second half of the year, there is a likely hold that oil prices would be $80 to $90 per barrel.

“But that would only be short-lived. We shouldn’t discount the fact that this is a very deliberate strategy on the part of Saudi Arabia in particular, to move away from the price targeting.

“So, for countries like Nigeria, the important take away is that we have moved away from that world of triple digit oil prices and what we would see going forward is more like double digits oil prices scenario.

“We know about the extent to which Nigeria failed to capitalise properly in the boom years in terms of oil production when the oil prices were high. So, it is not going to be that easy, given the demands from the fiscal side, to rebuild fiscal buffers in a low oil price environment,” the bank chief said.

However, Khan pointed out that Nigeria may be seeing a current account deficit moving forward, saying that an oil price of $85 or below, assuming that import doesn’t adjust, then Nigeria will lose the current account surplus status.

The bank chief said that it is possible that government would be raising capital, though there is also the willingness not to crowd out the domestic market with excessive domestic borrowing.

“We have obviously seen the passage of the budget and it is unlikely that any of the assumptions are going to change very dramatically. If we are right in thinking that oil prices will bounce back by the second half of the year, that will certainly provide a certain element of reprieve in terms of acting as a buffer and there may not be need for as much borrowing as envisaged.

“But I think that anyone looking at Nigeria’s situation would say there is likely going to be a case for external borrowing. What we don’t know yet is how open and favourable the external debt market is, given what might happen at the Federal Reserve,” Khan said.

Speaking on the controversial issue of fuel subsidy, Khan posited: “Absolutely, I think it should be removed. If you look at the reasons for the fuel subsidy and its economic effect, it is very regressive because of its cost on the whole economy.”

The banker said the subsidy regime takes away resources from the poor and rewards those who consume more fuel, which are mostly wealthy Nigerians.

“So, just from a perspective of having a tax regime that isn’t regressive, there are very serious reasons for the eradication of that subsidy. We would rather need market forces to start playing a greater role in Nigeria and that is another argument that is needed to move away and get rid of the subsidy regime which is a great distortion,” she added.