WHY HIGHER CRUDE OIL PRICES WON’T SAVE NIGERIA’S ECONOMY
By: Sir Henry Olujimi Boyo (Les Leba), first published in March 2018
INTRO:
Last week, this column republished “Fuel Price: The Bone in NNPC’s Throat” which discussed the differences in petrol and kerosene prices in light of deregulation. The republication can be found by accessing the link below.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)
Today’s article is laid out in an interview style format to answer impending questions in the minds of readers and the public at large. It discusses the underlying effects of increase in crude oil prices on poverty reduction, and queries Nigeria’s growing debt burden in proximity to developments of this nature. Kindly read on for a thorough analysis.
As you read through the below article taking note of previous events and rates, keep in mind its initial publication (2018).
Nigeria’s income from crude oil export has lately been boosted, fortuitously, by the unexpected rise in crude oil prices, beyond the 2017 budget benchmark of $44.5/barrel. This favourable outcome which is evidently buoyed by OPEC’s strategic supply management, should ordinarily be a blessing to our economy. Indeed, such optimism on oil price may also be sustained by the International Energy Agency’s January 2018 Oil Market Report, which projects oil price to remain between $60-$70/barrel this year.
The question, however, is whether the present over 50% rise in crude price and export dollar earnings will also trickle down to increase consumer demand and trigger an expansion in Manufacturing and Agro-allied Industries. Furthermore, will such expansion lead to the creation of more jobs and less poverty?
These issues are examined, hereafter, in an interrogative format to encourage a simultaneous personal appraisal, by the reader. Please read on:
Why are you pessimistic about the positive impact of crude prices rising above 50% of the 2018 budget projection of $45/barrel? After all, such a huge wind-fall should provide much needed revenue to fund the budget and possibly also, stop us from more debts, with recklessly high rates of interest for government’s risk free loans?
It’s not the first time that crude prices have significantly exceeded budget benchmark; evidently, even when crude prices exceeded $100/barrel with steady output between 2011-2013, the substantially increased export revenue, did not trickle down and job opportunities remained scarce, besides, the social misery index of our people stayed relatively flat.
Consequently, if $100-$140/barrel crude price did not reflect any laudable impact in promoting inclusive growth, it would be foolhardy, therefore, to expect any major transformation, when crude prices hover, relatively humbly, between $60-$70/barrel. Experience, they say, is a good teacher!
Shouldn’t the increased revenue from higher crude prices reduce the N2.5Tn deficit projected in the 2018 budget and also reduce the need to borrow?
You are seriously mistaken to expect such level of responsibility from the Lawmakers or Federal Executive. In fact, it has become a tradition, for annual budgets to be deliberately predicated on very conservative crude oil price benchmarks, even when credible projections, like the IEA January report, for example, predict more robust prices. Ultimately, the lower budget benchmarks willfully adopted, will invariably induce increased government borrowing to fund projected deficits in the annual appropriation plan.
Sadly, however, instead of applying the additional revenue from higher oil prices to reduce budget deficit and the need to borrow, the political class, will have none of that. Over the years, the projected deficit, deliberately predicated on lower crude prices, were still financed with high interest loans, while the “excess revenue” consolidated from higher than oil price benchmark is usually, temporarily consolidated into an account, which is unknown to our Constitution. Ultimately, State Governors will conspire with the Federal Executive, without recourse to the Legislature, to also spend additional earnings from the “Excess Crude Account,” even after loans have been obtained to fund the appropriated actual deficit for that year! Thus, the present excess revenue from crude prices ranging between $60-$70/barrel will also be similarly frittered away as in the past.
Even if it is true that government loans are obtained at high interest rates, even when unencumbered excess foreign exchange is available, you cannot however, deny that the increased spending from both the loans obtained and higher oil revenue, will trickle down to stimulate consumer demand, reduce poverty and social stress with lower prices for more goods and services.
Well, I don’t need to deny anything, I don’t know in which economy you live in, but in the Nigerian economy, the tradition of incurring and spending both the loans and the excess revenue has never reduced prices of goods and services, to make life more affordable. Furthermore, food prices have consistently risen by over 10% for several years, despite humongous billions of dollars and Naira spent annually, by government. It is self-evident therefore, that the common man will not enjoy any significant benefit, if government remains loyal, to the traditional process of consuming loans projected in each year’s budget as well as any excess revenue from higher crude prices and output.
Nonetheless, if funds consolidated by government from both loans and higher crude prices are spent in the same year, why does such huge spending not trickle down to spur consumer demand or even reduce the cost of living?
Well, the problem lies with the process adopted for infusing government’s dollar revenue, into the economy. Indeed, so long as the Central Bank persists in deliberately substituting Naira allocations for dollar denominated revenue, the economy will continue to be awash with surplus Naira, which will compel and sustain inflation rates well above 10% to reduce the purchasing power of all income earners, and deepen poverty, nationwide. Undeniably, however, low consumer prices (i.e. lower inflation rates 1-3%) are certainly the surest way to alleviate mass poverty and social stress.
Furthermore, the procedure by which CBN unilaterally determines Naira exchange rate through market auctions of dollar rations, is invariably, monopolistic and transforms CBN to a glorified Bureau de Change which has, unexpectedly, also become a defender of the dollar instead of Naira. This self-serving monetary management is actually responsible for weaker Naira exchange rates, which also ceaselessly drive inflation and fuel prices.
Have you ever wondered why the Naira exchange rate; hardly appreciated, even when foreign reserves were exceptionally bountiful around $60bn in 2008? Instructively, with the current mode of substitution of Naira allocations for dollar revenue, the more dollars we earn, the bigger will be Naira balances created as substitute, and the greater, therefore, would be the threat of inflation, and ultimately the higher also, will be the cost of borrowing, as it is clearly irrational and unbusinesslike for any person to lend out funds below the prevailing rate of inflation.
From your preceding argument, what is the major impact on the economy if the Naira exchange rate remains relatively, static, even when crude price and revenue double in value?
In fact, this development is the real cause of increasing subsidy payments and the seeming inability to deregulate petrol pricing. The Naira rate has no business remaining weak or static, if in addition to higher dollar earnings; Nigeria also for example, posted a positive trade balance of about N4tn in 2017, as reported by National Bureau of Statistics last week.
Ultimately, if this contradiction subsists, and petrol price remains regulated, our ECOWAS neighbours will become major beneficiaries of Nigeria’s heavily subsidized petrol price and we may end up devoting over 50% of annual budgets to petrol subsidy alone, if crude oil price further spikes!!
SAVE THE NAIRA, SAVE NIGERIA!!
