In-depth Analysis of 2019 budget and oil price volatilityKehinde LAWAL
A recent report of the slump in the price of crude oil to about US $60 from almost US $70 per barrel has really become worrisome for Nigeria’s implementation of the 2019 budget, despite some development in the Persian Gulf, which should not be a source of inspiration, after all.
That the Nigerian economy is mono-cultural and depends largely on the oil sector for its sustenance is well known to many and thus no strange news. Over the years, since the first oil price shock of the late 1970s, various administrations in the country have acknowledged this and put in place various measures to mitigate its negative effects, either by cutting expenditures or looking for alternative revenue sources for the economy.
Hence the singsong on diversification of the Nigerian economy has been on since that period as well as orchestrated by all the successive administrations in the country. Thus the current chorus of diversification of the economy by the Buhari administration is not its original initiative but has been sung by virtually every administration before it.
However, the current administration has rightly placed focus on encouraging and supporting production in agriculture, mining and other key sectors to promote diversification though the results have been largely minimal. This implies that the much-publicised achievements in the diversification of the economy in the past four years appears more of a spin than of real substantial achievements.
So, the recent report of the slump in the price of crude oil to about US $60 from almost US $70 per barrel has really become worrisome for Nigeria. This is because the benchmark price for crude oil used in preparing the 2019 budget is US $60 per barrel and any price less than this price will render the entire document and its estimates suspect and difficult to implement.
The fragility of the oil market has been a source of concern, not only to Nigeria but to virtually all oil exporting countries both OPEC and non-OPEC including big countries such as Russia. The effects, however, vary from country to country such that those with sufficient savings are less affected. The recent tumbling of oil price was largely due to unexpected rise in U.S. crude inventories coupled with weaker outlook for global demand, particularly with the on-going trade war between the U.S. and China. The threat by the U.S. to also place tariffs on Mexican imports due to the war on illegal immigration to the U.S. is also contributory.
While these issues are being sorted out, for example, with OPEC and non-OPEC countries trying to cut production levels, the effects on economies such as Nigeria’s are not in any way diminished. Whether production levels are cut by OPEC to jerk up international crude oil prices or not, Nigeria’s 2019 budgeted expenditure of N8.8 trillion is at great risk of not being achieved. A cut in OPEC production quota for Nigeria will fall short of the projected 2.3 million barrels per day for the 2019 budget, which will still affect the budget estimates. Given that these developments are exogenous to the domestic economy, the game is completely outside the control of the managers of the Nigerian economy.
This is a clear rehash of events the country is very much accustomed to from its inglorious past of poor budget implementation. The question thus arises of how the 2019 budget will be financed. The situation is made worse by the fact that the drawdown to the Excess Crude Account has been drastic, with the Account falling from its 2015 level of over US $2.1 billion to less than US $700 million in 2019 with a whooping US $1.0 billion withdrawn to fight insecurity, which appears not to have abated but even getting worse.
The budget projected that about 52% of the 2019 budget will be financed by oil revenue, which is the major source of funding the budget proposals. Projected revenues from company income tax and Joint Venture Equity restructuring which are the next major sources of revenue for the budget are merely about 11% and 10% of the total estimated revenue for the budget. Other projected sources of financing the budget such as customs duty and value added tax are all less than 5% of the total respectively. Hence reprieve may not even come from these sources because their capacities to fill the gap in oil revenue shortfalls are questionable. So where will the reprieve come from? Is it from the increase in borrowing when the budget already has a deficit of over N1.6 trillion expected to be financed from local and foreign sources. Or is it a resort to more borrowing when the debt service to revenue ratio of over 50% is becoming very worrisome with significant intergenerational implications.
This call to question the strategy of revamping the economy as proposed by this administration – that is, focus on diversification, as clearly stated in its 2017-2020 medium term Economic Recovery and Growth Plan, (ERGP). Diversification, as clearly articulated in the ERGP document appears not to have happened as, the preceding 2018 capital budget was implemented at less than 20%, attributed largely to lack of funds. This happened even prior to the slump in oil prices such that there are currently fears as to how funds could be generated to finance the 2019 budget.
Therefore, government has to put its acts together. It has to collaborate with all arms of government to find solution to this problem, more so since there is now a compliant and friendly National Assembly. There is no one left to blame for poor performance. Caution should also be taken in overheating the domestic debt market with serious implications for Treasury bill rate and interest rates in general. There is thus the great need for a strong collaboration between fiscal and monetary policy in the implementation of the budget such that the gains made in reducing inflation will not be lost if government erroneously resorts to printing money.
The Buhari administration has its work cut out for it. It has no one else to blame, not the oil market, not the past administration, not an uncooperative National Assembly, not anyone else except itself, if things go wrong. The Nigerian public will not entertain any further blame game in ensuring that the much orchestrated “Change” and “Next Level” as promised by the administration come to fruition.
The President needs to have some sense of urgency in forming his government, which should include his economic advisory council (EAC). No one will wait for months again before forming a government. South Africa just elected government constituted its cabinet the week it was sworn it barely a month ago. Nigerians would like some dynamism and sense of urgency from Abuja this time.