Slumping Oil, Ailing Economy Featured

Sunday, 01 February 2015 00:00 Written by  Published in Oil and Gas Read 952 times

Prince Etele writes that Nigeria's effort to cushion the effect of oil price slump on the economy may require some revisiting

For more than three decades, crude oil has been a major source of revenue, energy and foreign exchange for the Nigerian economy. Nigeria's economy as at today is struggling to leverage the country's vast wealth in fossil fuels in order to displace the crushing poverty that affects about 57 percent of its population. Economists refer to the coexistence of vast wealth of natural resources and extreme personal poverty in developing countries like Nigeria as the “resource curse”.

Nigeria's exports of oil and natural gas at a time of peak price enabled the country to post merchandise trade and account surpluses in recent years. Reportedly, 80 percent of Nigeria's energy revenues flow to the government, 16 percent covers operational costs, and the remaining 4 percent go to investors. However, the World Bank has estimated that because of corruption 80 percent of those revenues benefit only one percent of the population. In 2005, Nigeria achieved a milestone agreement with the Paris Club of lending nations to eliminate all of its bilateral external debt. Under the agreement the lenders will forgive most of the debt, and Nigeria will pay off the remainder with a portion of its oil revenues. Outside of the sector, Nigeria's economy is highly inefficient.

The oil boom of the 1970s led Nigeria to neglect its strong agricultural and light manufacturing bases, in favour of an unhealthy dependence on crude oil. As such in 2000 oil and gas exports accounted for more than 98% of export earnings, and about 83% of federal government revenue. This new oil wealth of modern time led to the decline of other economic sectors, and a lurch toward a statist economic model that fueled massive migration to the cities and led to increasingly widespread poverty, especially in rural areas. It also begot the collapse of basic infrastructure and social services in the early 1980s.

By 2000 Nigeria's per capita income had plunged to about one-quarter of its mid-1970s high, below the level at independence. Along with the endemic malaise of Nigeria's non-oil sectors, the economy continues to witness massive growth of "informal sector" economic activities, estimated by some analysts to be as high as 75 % of the nation's total economy.

For the sake of history and basic research, oil was first discovered in Nigeria in 1956 at Oloibiri in the Niger Delta, the present Bayelsa State, after half a century of exploration. The discovery was made by Shell-BP. At the time the sole concessionaire, Nigeria, joined the ranks of oil producers in 1958, when its first oil field came on-stream, producing 5,100 bpd. After 1960 exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies. In 1965 the EA field was discovered by Shell in shallow water south-east of Warri, Delta State.

Moreover in 1970 the end of the Biafran war coincided with the rise in the world oil price, and Nigeria was able to reap instant riches from its oil production. Nigeria joined the Organization of Petroleum Exporting Countries (OPEC) in 1971 and established the Nigerian National Petroleum Company (NNPC) in 1977; a state-owned and controlled company which is a major player in both the upstream and downstream sectors.

Although production figures dropped in the 1980s and 90s due to economic slump, 2004 and 2005 saw a total rejuvenation of oil production to a record level of 2.5 million barrels per day. It was anticipated then that production would increase to 4 million barrels per day by the year 2010 and 2014 respectively.

The question is, as at 2014 and this early 2015 what happens to the predictions of raising the nation's oil revenue (international market price)? We are rather seeing the reverse. Now that the nation's largest and most dependable revenue source is faced with crises, how will the economy, the institutions and the machineries of the state survive?

Petroleum production and export play a dominant role in Nigeria's economy, and account for about 75% to 90 % of her gross earnings in the past. This dominant role pushed agriculture, the traditional mainstay of the economy in the early 1950s and 60s, to the background.
While the discovery of oil in the eastern and mid-western regions of the Niger Delta pleased hopeful Nigerians, giving them an early indication soon after independence that economic development was within reach, it signaled a danger of grave consequence; which is the present scenario: oil revenues fueled already existing ethnic and political tension and actually "burned" the country.

That oil shock was initially positive for the country; but with mismanagement and military rule it became an economic disaster. The larger middle class produced by the oil boom of the 1970s gradually became disenchanted in the 1980s, and rebellious in the 1990s.
The enormous impact of the oil shock could not escape scholarly attention. For almost twenty years (1970s-1990s) the virtual obsession was to analyze the consequences of oil on Nigeria.

If many had hoped that oil would turn Nigeria into an industrial power and a prosperous country based on a large middle class, they were to be disappointed when a formally rich country is today suffering from that oil game of defeat played on it by the Western powers, and forced it to become a nation of debts.

CBN and Barrels of Oil
It gets tougher before it gets better seems to be the message sent to the financial market and the entire economy by the Central Bank of Nigeria (CBN), after the historic monetary policy committee meeting last month, a source who attended the briefing of the CBN governor, Mr. Godwin Emefiele, said. Major policy pronouncements were made to address the impact of the sliding oil prices on the economy, and the views of economic analysts who have been keeping close tabs on the financial system were presented.

The news hounds, whose figures were conservatively put at well over 150 were not oblivious of the tension in the international and local financial markets, over the issue of the tumbling oil prices and the attendant constraints on an oil dependent nation like Nigeria.

By the time Emefiele read the decisions of the Monetary Policy Committee, which had deliberated on a range of issues for two days, it dawned on reporters that Nigerians were in for a great change.

Government Impact
The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala has assured Nigerians that the finance ministry and the economic management team are working on several scenarios, which include reviewing the nation's policies on investment incentives, and waivers and exemptions to stem the tide of abuses.

Speaking at the Securities and Exchange Commission's (SEC) 4th Annual Capital Market Committee Retreat holding in Abuja last month, the minister listed other measures to include reducing oil price potentials; increasing the nation's non-oil revenue as a percentage of gross domestic product (GDP) to $3 billion in three years; cutting certain recurrent spending such as the purchase of administrative equipment, overseas travel and training; and implementing some cuts in capital expenditure in the 2015 budget.

She affirmed that her first measure was to make up her mind that panic would not solve the problem, stressing that no nation manages economic crisis successfully with panic. According to her, “Panic is not a strategy. We are managing the situation to keep the economy on a stable sustainable course and we will not listen to those who want us to throw up our hands in despair and give up”.

“Our scenario-based approach to managing the impact of the oil price drop is proactive and comprehensive. Even if the price drops to 60 dollars, we are ready.

“As a central part of our strategy, we have revised our oil price anticipations over the short to medium-term. We have lowered our benchmark oil price assumption to $73 per barrel after some careful analysis of the possible future direction of oil prices, as well as the soft floor price for shale oil, which is estimated at about $75 per barrel”. “But let me clearly state that we are not taking a point-estimate position as regards the future price of oil. We fully recognize that oil prices may fall lower or even rebound.

The minister, in her assurance message to Nigerians, has pointed out that what government would work within a range of $60 to $85 thought possible by analysts. It puts a package of measures around an estimate at the mid-point of that range, that is $73, and then built additional measures for scenarios at $70, $65 and $60 a barrel, with that proportion the country will beat the shock for a positive or robust economy in the years to come.
Meanwhile, the International Monetary Fund (IMF) has said the measures put in place by the federal government aimed at mitigating the impact of the recent significant fall in global oil prices on the economy is a move “in the right direction”.

Gene Leon, the International Monetary Fund (IMF) mission chief for Nigeria said this in a statement made earlier in the year. According to Leon the authorities have announced a set of policies aimed at mitigating the impact of the recent significant fall in global oil prices on the economy.
However, no sooner had the CBN governor ended his briefing than the story of the daring move to halt the falling value of naira, check the hemorrhage at the stock market and arrest the depletion of the nation's external reserves went viral in the nation's media space. Expectedly, the response of commentators on economic affairs on the new regime of rate tightening was spontaneous and very informing.

According to Afrinvest West Africa, a finance and investment advisory firm, the series of adjustments at the last MPC meeting is expected to have direct impact on the capital markets and the broader macro economy. The firm believed certain dynamic ramifications would be unveiled as the policy continues to be implemented.

As much as the US has put a stop to the importation of crude oil from foreign oil producing states due to the increase in the local production of the US oil, the line of drum dance that beat the scorn of Nigeria is that; were we prepared for this sudden dwindle? Is Nigeria the only oil producing nation affected by this shock? What is the present possible revenue ventures of other nations involved in the oil crisis? Can Nigeria survive the crisis with the level of international warfare befalling the nation?

Last modified on Monday, 27 July 2015 15:50