For once, rising oil prices mean falling knives
The uptick in oil prices is indicative of a recuperating economy, after an ‘interregnum’ triggered by COVID-19.
But for Nigeria, the positive outlook is a reminder of the historic falling knives that is associated with crude and everything it represents in the domestic economy.
If oil prices are bullish, as they currently are, the government earns more money and can fulfil its financial obligations. When it earns less, as it did last year when crude bottomed out as it were, its financial capacity shrinks, sending the economy, which is reasonably dependent on government spending, to tailspin.
But the dynamics of oil is much deeper. Nigeria exports crude but imports all the byproducts of the vital resource, including the most touchy premium motor spirit (PMS). With Nigeria’s refineries operating at a near-zero capacity, the country depends solely on importation for its daily PMS need, which is estimated at N52 million litres.
Hence, rising oil prices mean more pressure on the country’s foreign exchange, 90 per cent of which is, ironically, earned from crude exports.
More than ever, this has pushed the politics of crude prices beyond a binary discourse for most Nigerians. It is no longer a simple choice between bullish or bearish oil prices but the right mix of prices that are suitable for Nigeria’s peculiar challenge – a country so blessed with crude but lacks the capacity to process it into consumables.
Today, Nigeria is at a crossroad – to end or keep the fuel subsidy regime. If it takes the first option, which Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, like many other stakeholders, says, is the most desirable though a painful option, as it will pull additional millions of Nigerians below the poverty line and increase the misery index. Energy cost is an increasing function of inflation, an economic theory that has been tested severally by historical facts.
A litre of PMS, which is currently subsidised by the sole importer – the Nigerian National Petroleum Corporation (NNPC) – sells for N163. That is an over 10 per cent discount on the N184 landing cost. A deregulated PMS market means Nigerians would pay higher to free more money for statecraft issues.
The grim consequence of PMS for the country’s fiscal stability came to the fore recently when a purported linked memo from NNPC to the Accountant General, Ahmed Idris, claimed that the corporation would not have money to remit to the Federation Accounts Allocation Committee (FAAC) in May.
“The price (of PMS) could have been anywhere between N211 and N234 to the litre. The meaning of this is that consumers are not paying for the full value of the PMS that we are consuming and therefore someone is paying that cost. As we speak today, the difference is being carried in the books of NNPC and I can confirm to you that NNPC may no longer be in a position to carry that burden,” the memo, which was later dismissed as untrue by Idris, states.
Prof. Akpan Ekpo, a leading Nigerian economist, says rising inflation will worsen poverty and makes the lives of millions of struggling Nigerians more miserable. In the event government pulls the rug to pave way for a cost-reflective PMS, inflation will shoot up while an increasing number of Nigerians will face a survival crisis.
Ayodeji Ebo, a financial analyst, suggests that the imminent increase in energy cost can only imply higher transportation cost and ultimately prices, meaning the country will see a steeper rise in inflation, which hit 18.17 per cent in March, the worst in over three years. While April consumers’ price index (CPI) is yet to be released, experts expect the headline inflation to touch 20 per cent or slightly lower.
In the face of dwindling incomes, the government has held on against the call for full deregulation. The struggle against subsidy has a strong historical socio-political context, in which the organised labour is central. Occupy Nigeria, which has become a reference in civil unrest cause, shut down the country for almost two weeks in 2012 following the government’s first bold step at ending fuel subsidy, which the Goodluck Jonathan administration said claimed $18 billion in 2011. Recent attempts at ending the age-long social scheme have been similarly stalled by endless negotiations between the government and labour.
If the government bites the bullet and deregulates the downstream sector, the challenges in oil and gas may not end. It will, however, free some resources for other timely infrastructure interventions, experts have noted.
Perhaps, there is no better time to end the scourge than now. The national debt stocks had hit N32.9 trillion in December. While the government rues mounting debts and declining financial capacity, the cost of governance, which subsidy is just a part of, has continued to rise.
The growing liquidity crisis. The Guardian reported, many state governors are queuing for commercial loans to offset “spending plans and schedules” that cannot wait, which is raising dust in the financial circle as it would increase the already high banks’ exposure to the public sector.
“The states are broke, and there is not much on the table to shore up their finances in the next one to two years. This should leave any prospective lender with worry. We only hope the government will not expose the banks to financial risks. Unfortunately, some of the bank chiefs do not know how to say no to the government’s request because of their subtle blackmail,” a banker told The Guardian.
As of the close of last year, loans extended to the public sector accounted for 8.7 per cent of the total N20 trillion commercial loans.
This year, the country’s 36 states and the Federal Capital Territory (FCT) will spend about N3.1 billion on recurrent bills, The Guardian’s computation of the 2021 budgets has revealed.
An end to fuel subsidy will, certainly, reduce financial pressure on the government. Otherwise, rising crude prices can only mean more woes. But there are more issues on the table that makes the positive oil market not exciting for Nigeria.
At the turn of the year, the Chairman of the Presidential Economic Advisory Council, Dr. Doyin Salami, pointed out that external imbalances were major undoing factors contending with the economic recovery process. Another economist, Dr. Biodun Adedipe, corroborated Salami’s position, saying Nigeria could not go far in the recovering path except the widening trade deficits are contained.
Indeed, Nigeria had maintained a positive trade balance in recent years until the last quarter of 2019 when it drifted to the negative territory. Then, the country recorded a deficit trade balance of N0.6 trillion, for the first time since the third quarter of 2016. The moderate shortfall has grown over time, stopping at –N2.4 trillion at the close of last year.
A growing trade deficit is a drain on the foreign reserve, which means that whatever foreign earnings the country would have saved on the account of rising oil prices will be frittered away via growing import bills. Interestingly, the movement chart of the country’s external reserve does not reflect the positive crude outlook. The reserve has declined consistently from $35.2 billion to $34.7 billion as of May 5, 2020.
And most, unfortunately, Nigeria is currently losing fresh energy investments to another competing market. Bala Zakka, an energy expert, says this may not improve soon as international oil companies (IOCs) are not favourably disposed to the country in terms of Final Investment Decision (FID) analysis.
With the worsened security situation, there are concerns that the country will be left in the lurch as oil majors look elsewhere for investment, which could stall production and make the bullish oil outlook a tragic experience for Nigeria.