Udoh: A strengthened real sector is panacea to oil crisis
South-South Coordinator, Institute of Chartered Economists of Nigeria, Mr. Friday Udoh, told KELVIN EBIRI that Nigeria’s economy would remain susceptible to the volatility of global oil price unless it is diversified. While observing that prolonged oil glut will be disastrous for the 2020 budget, he recommended adoption of crude oil swap for projects, as an alternative means to fund critical infrastructural projects.
Nigerians seem to be in a panic mode regarding the oil war between Russia and Saudi Arabia. Why?
The reason Nigeria is in a panic mode is that when there is oil glut, which means too much supply, there is bound to be a crash in price. Besides, there is the coronavirus pandemic. There is always a boom and burst in the commodity market. You shouldn’t have 100 per cent belief that commodity market price would always be stable because a lot of fundamentals determine this.
Presently, the coronavirus is a contributory factor. If you look at the United States today, they have moved from the export of crude oil to import. Once in a while, American refineries look for crude from Nigeria. America has sufficient crude oil and has been able to meet domestic demand. At the same time, it could export. Saudi always prefers the price to be better, when there is no glut in the international market.
Does the slump price warrant government setting up a committee to review the budget?
It is panic. Firstly, it is obvious that the economy is in danger. Of course, petroleum contributes over seven percent to the national GDP, and with this kind of issue, coupled with the high unemployment rate, and the real sector being near absent, the country is in crisis. When the real sector (manufacturing and services) is near absent, there is nothing to hold the economy. So, the slump in price is a threat to the economy and a source of worry.
How long can Nigeria survive such oil conflicts?
Our government is not sincere. We have the human resources, which if well harnessed, together with the other resources we are blessed with; we will have a better economy. Government is in a position to harness these resources.
Another issue plaguing us is that government institutions are weak. Government should be able to evaluate the state of its institutions, ensure they work and are independent. Weak institutions mean you cannot achieve diversification.
If government institutions are not strong, then the country cannot attract investment. It is just like being in business. You need a stronger reputation. Unemployment has created a lot of monsters in many forms. I believe the government may not have realised that employment is the first step out of poverty. It is at the core of economic development and social stability.
For instance, we have aluminium smelter plant with an installed capacity of 193 thousand tonnes, but we are allowing it to waste, due to unnecessary litigation. This plant is supposed to generate up to 61, 200 employment for the citizens. The current aluminium price in the world market is $1, 800 per tonne. If you multiple $1, 800 per tonne of aluminium by 193, 000 tonnes per year, you will see what the country is losing as revenue.
The Aluminium Smelter Company of Nigeria (ALSCON) ceased production in 2013. Prior to that time, the plant operators had been engrossed in legal problems, due to reckless, corrupt privatisation exercise. The Russians, who were producing at about 15 percent installed capacity, stopped production in 2013. If you calculate the amount of money the country has lost since then, it will be shocking.
Aluminium utilises energy, which is gas. The amount of gas that is supposed to be used to create wealth for the nation and grow the economy is released into the atmosphere. It is regrettable that the government has failed to resolve the legal issue that could get 161, 200 people back to work.
Are you suggesting that Nigeria should rather use oil as energy, rather than a source of revenue?
This is where diversification of the economy comes in. When Nigeria looks beyond the exportation of crude oil to harnessing the potentials of crude oil, the country’s problem will be solved. But how will they do this, when there are no resources to build the required infrastructure to harness the oil resources?
Government has to sit down and create a special purpose vehicle or synthetic way of developing such infrastructure, so that could be able to optimise potentials of crude oil and natural gas in the country to boost revenue earnings. I know countries that swap crude oil for projects.
Now, the revenue is contrasting, such that it cannot finance the transportation sector programmes in the 2020 budget. We need real sector.
As a country, we will experience less investment inflow into the economy. Government needs to sit down and work out how we can enhance and expand the real sector. Swapping of crude oil for projects is one option. After building Eleme Petroleum Chemical and NAFCON, we have not had any major investment in the oil and gas sector. We have problems in the real sector. No economy can grow without the real sector.
Investment under this circumstance, with weak institutions, will naturally shrink. So, the government needs to develop different financial options to create an infrastructure that will strengthen the real sector. We need more investments in refineries, more petrochemical plants. The government is not only facing the problem of dwindling oil price, but the onshore oilfields are also ageing. They are not producing optimally.
What we have now are mainly deep water and ultra-deep water operations. Besides, most of the offshore wells are also ageing. Some of the platforms have outlived their lifespan. Building such facilities cost money, and it reduces the government’s takes. I still advise the President to look for competent people to man key sectors of the economy. No country can survive under this status quo.
Nigerian economy is like a pillar that needs to be strengthened carefully with special emphasis on social development, by putting a human face on the economy.
How will the slump in oil price affect the 2020 budget?
It is going to be very challenging. This a troubled time for the economy. Looking at the budget, there are lots of infrastructure projects, especially in the transportation sector. But how will you be able to execute a project without revenue? It is not possible to execute any project without money at hand. So, whatever money comes in will be spent on recurrent expenditure, which is too bad. It will be difficult to implement any meaningful infrastructure in the present circumstance.
So, what does Saudi Arabia increasing its oil output from 10 to 12 million barrels per day portend for Nigeria?
It is just like Ogoni farmers and Kwale farmers producing so much garri and then dumping the garri in Port Harcourt market. Naturally, the price of garri will crash. With productivity low in China, being a major importer of petroleum, the price will further crash. It is a problem for Nigeria. Mr. President has to engrave his name in gold by dealing with this issue of over-dependence on oil.
As I am talking to you, there are some ships waiting for buyers, instead of the buyers waiting for them. The synthetic model of financing projects is necessary at this point if the government wants to create critical infrastructure for the real sector to thrive. Oil for the project has to be monitored to avoid abuse. Saudi increasing its oil production is a disaster for Nigeria, as the country’s revenue will decrease.
Implementation of the budget will be hampered. The country is unnecessarily concentrated on infinite oil reserve against non-fuel merchandise sector that could have protected the economy from vulnerability to shockwave in commodity prices and cloudy post-oil future. This government’s attitude contributes to the real sector’s abysmal performance.
Why does economy suffer? It is due to policy malfeasance/uncertainty. We need to overhaul policies and approaches, including the financial model that enhances the development of the real sector. That is the funding of infrastructural development by dedicating crude for development, especially toward the real sector for greater output and compensate for the shocking global energy market.
There is growing anxiety that the country’s economy is becoming a pillar that is raised in a swamp that needs to be strengthened carefully with the efficient appropriation of resources, with specific attention to economic diversification, together with social development.
How can Nigeria avert being a victim of this vicious circle of oil price unpredictability?
It is sad to say that for over 25 years now, there is no serious import substitution project. In my joint paper published in Romania on the neglect of the steel and aluminium sector, I stressed that this has cost Nigeria $99.9b in lost output. I informed the government of the impending oil price crash. I mentioned policy malfeasance earlier, which simply tells us about the uncertainty in government policies. The right hands are not on the job.
How could a 1.3 million tonnes per year Ajaokuta plant that is capable of creating over 510, 000 (direct and indirect) jobs and ALSCON be allowed to rot away and cannibalized at the instance of Bureau of Public Enterprise (BPE), which sold the same scrap to the public? Ajaokuta (upstream, midstream and downstream) could generate over N58b. ALSCON can generate N13b per annum. Total N71 b/per year, representing revenue loss that should supposedly compensate for the event of this nature.
Ajaokuta has the capacity to commercially utilise over six million tonnes per year freight. By implication, the transportation sector stands to gain, just as ALSCON has about 1.3 tonnes freight capacity. ALSCON was built at $3.2b and Ajaokuta was built at $10b. With Corona virus and many other factors, the first quarter, 2020 GDP is going to be affected seriously, just as budget implementation will be affected. Under this circumstance, the government must tread consciously with fiscal and monetary policies. At this point, governance is no business as usual.