WHY HIGHER OIL PRICES CRIPPLE THE ECONOMY
BY HENRY BOYO
The crash in crude oil price is usually identified as the major contributor to the prevailing parlous state of our economy; clearly, the drop in oil prices from over $120/barrel to a more humble price below $50/barrel and the significant drop in output, have certainly reduced revenue inflow. Thus, one may be tempted to suggest that, if "fortuitously", oil prices soar well above $120/barrel, once more, with production also constantly exceeding 2.5mbd, our revenue base should expectedly flourish and all will be well again, as more money will become available.
Hereafter, we shall examine this popular perception in the following interrogative narrative.
Q) Will higher oil prices and output be a blessing to Nigerians?
This popular expectation may not actually stand up to scrutiny. We may recall that even when oil price approached $150/barrel, with the dollar reserve windfall above $60bn, more Nigerians inexplicably joined the ranks of the poor with a subsistence income of less than $2/day!
Q) Why does the Nigerian economy suffer when crude oil price rises?
This is a good question, because it is ironical that our economy should suffer with increasingly more dollar revenue. But the reason is quite simple; for example, if China were to immediately create the Yuan equivalent for her trillions of dollars export earnings, of course, the local currency will become embarrassingly surplus everywhere and will inevitably quickly lose much of its purchasing value. Ultimately, even the Chinese will prefer to hold a more stable currency than their own Yuan; indeed, any country that subjects their currency to such reckless humiliation will inevitably turn bountiful export earnings into a curse! This is exactly what increasing dollar export revenue from higher crude oil prices and output does to the Naira and Nigerians.
Q) Are you saying that increasing dollar earnings is actually the cause of the unrelenting burden of too much naira in the system?
Yes, that is so and until the current misguided system of infusing export dollar revenue into the system is stopped, it may be better for us to pray that oil prices do not rise to enhance our export earnings!
You see, the bountiful income from rising oil prices promotes a liquidity problem when Naira allocations are deliberately substituted for the dollar revenue.
Q) How can systemic surplus cash be a problem when both the public and private sectors have severe funding deprivation?
That is the irony of the obtuse monetary strategy that the authorities embrace; it is equally inexplicable, that cost of funds should also become more expensive when cash is surplus.
Q) Why is it that the surplus money cannot be put to good economic use by either the public or the private sector?
Well, the Central Bank which has the mandate for monetary policy management creates hurdles that discourage liberal access to the readily available surplus money in the system.
Q) What sort of hurdles?
First of all, the CBN raises its own price of funds when commercial banks come to borrow to supplement their cash positions. Ultimately, if CBN rates are as high as the current 13 percent, the banks would in turn lend money to their customers with a profit which may exceed 80 percent of their own cost of funds as is currently the case. Furthermore, the CBN could also order commercial banks to reduce credit by sequestering increasing portions of their customers' deposits as idle funds; presently, the mandatory cash reserve ratio for banks is 31 percent of all deposits. These ratios would conversely be reduced if Central Bank wishes to encourage credit expansion to increase consumer demand that will induce more investments and create jobs.
Worse still, the CBN would also crowd out the real sector from available credit by borrowing and ironically keeping sterile, hundreds of billions of Naira with oppressive interest rates.
Q) So, it's not as if there are no funds to stimulate consumer demand and spur investment.
No, infact less than 25 percent of total bank lending capacity of well over N60Tn is currently utilized; this compares unfavorably with a ratio of 130 percent for China and about 70 percent for South Africa.
Q) So, why does the CBN put hurdles in the path of bank lending?
Well, the Apex bank is concerned that if the banks utilize all the available surplus Naira, the resultant rising tide of inflation will reduce the purchasing power of incomes and deepen poverty.
Q) What is the impact of the special intervention funds from the CBN?
Well, as you can imagine, if government makes sectoral interventions with hundreds of billions of Naira when surplus cash is already a problem, the impact of spending the additional intervention funds in any manner whatsoever, will simply 'inadvertently' exacerbate the threat of inflation, i.e. too much money chasing few goods and services.
Q) Why is it that the naira does not really appreciate in value when oil prices are high and our dollar earnings soar?
This is simply because the increasingly surplus Naira deliberately substituted for export dollar earnings confronts rationed dollar supplies in the money market; the resultant forces of supply and demand will inevitably tilt in favor of the dollar so that Naira will be priced lower. We will recall that even when so called "reserves" approached $60bn, the Naira exchange rate remained stagnant, but interestingly, as soon as oil prices dipped and revenue dropped, the Naira quickly came under pressure and currently exchanges for about N200=$1 officially and over N220=$1 in the parallel market.
Q) Why is fuel price not cheaper in this country when we have oil in our backyard?
This popular perception is of course natural, but the truth is that the benefit of having oil in our backyard should be reflected in a stronger Naira, because, higher crude prices and output should increase dollar supply and induce a stronger local currency as more dollars become available in the market place against existing Naira values. Clearly, a stronger Naira will produce lower fuel prices that meet our expectation. For example, if the Naira exchange rate improves to N100=$1, domestic fuel price will immediately fall below the regulated pump price of N87/litre and quietly eliminate any form of subsidy. Indeed, a sales tax of up to 10 percent can be levied on fuel without breaching the current pump price.
Q) So how can the Naira exchange rate be improved?
The Naira exchange rate will gradually become stronger despite lower crude oil price, if distributable dollar revenue is not unilaterally substituted with fresh naira values; this is the prime cause of the ever surplus Naira that gulps up the relatively meager rations of dollars, subsequently, auctioned intermittently by the CBN.
Q) Are you saying that lower crude oil price is better for our economy?
The answer to this question is obvious, we are all current witnesses of the economic dislocation and social distress that low oil prices and output have precipitated, as both the Federal and State governments are heavily burdened by debt, while workers are owed several months salaries.
Q) So, is it a case of heads, poverty wins and tails, Nigerians lose?
That's the way the cookie crumbles, but it needn't be so if things are done properly.
SAVE THE NAIRA, SAVE NIGERIANS!!