More hurdles for economy as OPEC, stakeholders meet
Economists and other stakeholders in the oil and gas sector yesterday predicted a bumpy road for Nigeria’s N146.96 trillion economy, insisting that prevailing realities at the international oil market could worsen the nation’s fiscal outlook, especially the implementation of the N10.33 trillion 2020 budget. They also raised the alarm over another slip into recession and shortage of foreign exchange, given that the nation’s foreign reserve has depleted to about $40.95 billion.
The experts spoke ahead of a meeting of the Organisation of Petroleum Exporting Countries (OPEC) and other allies next tomorrow, where an agreement that could impact future oil prices may be reached. Though they expressed optimism in the continuous extension of oil production cut by OPEC and its allies to stabilise oil prices at the international market, they noted that Nigeria’s economy, with reference especially to the 2020 budget, remains volatile.
In the proposed 2020 budget, the Federal Government estimated oil sales to stand at 2.18 million bpd at a price of $57 per barrel, while the exchange rate is expected to remain N305 per dollar. But last week, the prices fell, eroding the increase recorded in November. West Texas Intermediate dropped more than four percent to settle at $55.17; Brent plummeted by $1.44 to settle at $62.43, while Bonny Light slumped by $1.9 to settle at $62.15. On Monday afternoon, WTI stood at $56.63, Brent at $62.08 while Bonny Light was $62.15.
Already, the International Energy Agency (IEA) has pointed to a looming oil glut, especially due to uncertainties clouding the global economy. IEA had reduced demand growth forecast by 100,000 bpd for both 2019 and 2020 to 1 million bpd and 1.2 million bpd, respectively. While data from the Central Bank of Nigeria (CBN) shows that Nigeria’s foreign reserves dropped by $812 million to $40.95 billion as at October 18, 2019, there have been doubts over growth rate for the global economy; most analysts are pessimistic about a stabilising oil price due to the current U.S.-China trade war, Brexit, and the crippling growth of major economies particularly China, India, Germany and others.
Gross Domestic Product (GDP) in Nigeria was worth $397.30 billion in 2018, representing 0.64 percent of GDP world economy. It averaged $125.26 billion from 1960 until 2018, reaching an all-time high of $568.50 billion in 2014 and a record low of $4.20 USD billion in 1960.While the GDP grew by 2.28 per cent year-on-year in real terms in the third quarter of 2019 as against 1.81 percent recorded in the third quarter of 2018, the stakeholders feared that the looming glut and possible cut in Nigeria’s production share at the OPEC meeting could erode the increase in the GDP, especially as inflation rate in Nigeria rose to its highest in eight months, hitting 11.61 percent in October, according to the National Bureau of Statistics.
The 2020 fiscal budget remains in a deficit, noted Prof. Segun Ajibola, a former chairman of council, Chartered Institute of Bankers of Nigeria and Dean, College of Postgraduate Studies, Caleb University. According to him, any cut in Nigeria’s quota below the projected level of 2.18 barrels per day would have a devastating effect on the budget implementation, worsening the projected deficit.
“As we inch close to the end of 2019, the foreign exchange reserve is at a low of $39 billion. At the current price of about $63, the price is still okay for the 2020 budget but there is no assurance that it won’t go down. Another challenge is the penchant of some OPEC members for disobeying quotas, especially those from the Middle East,” Ajibola said.
The only way out for Nigeria, Ajibola explained, is to reduce overdependence on oil as a source of revenue through a complete overhaul of the monolithic structure that has been the hallmark of Nigeria’s economy since the 1970s.In the face of mounting debt service and growing temptation to borrow an additional $29 billion, Ajibola said a cut in Nigeria’s quota would drive down foreign exchange earnings. “The economy is still stressed and we must pray and work hard so that it does not slip into another recession,” he warned.
Renowned energy economist, Prof. Adeola Adenikinju, of the Department of Economics, and Centre for Petroleum, Energy Economics and Law, University of Ibadan, said the outlook for crude oil price in 2020 is not very bright. He observed that the price of oil could hover around $58 per barrel in 2020, a development that would slightly be above the 2020 budget price of $57.
OPEC had previously adjusted Nigeria’s quota to 1.77 million bpd, up from 1.69 million bpd. Though Nigeria, since March this year, reportedly failed to comply, the Minister of State for Petroleum Resources said production has been reset to fully comply with the cartel.Adenikinju said further: “The fact is that Nigeria’s budget might become harder to implement. There will be no room for fiscal buffer and hence more reliance on debt to finance government expenses. The outlook for the states would even be worse as the new minimum wage kicks in, and with limited alternative sources of funding.”
He noted that the current fiscal projection for the oil sector is unrealistic. It would be better, he said, for the National Assembly to adopt a more conservative estimate for oil price and oil production, to allow for a more realistic budget that will prepare the economy against various vulnerabilities and uncertainties in the global economy.
Though Nigeria had enjoyed waiver from OPEC’s production cut, it might be difficult for such exemption to be granted, said Habeeb Jaiyeola, PricewaterhouseCoopers’ Associate Director, Energy, Utilities & Resources.“If we are granted a waiver, it will be good for us because our economy depends clearly on oil. That will allow us to push volume into the market and generate more revenue. However, if they do not grant us a waiver, it will have direct effect on our economy because our revenue is directly linked to oil,” Jaiyeola said.
The chairman, International Energy Services (IES) Ltd., Dr. Diran Fawibe, said the outcome of OPEC’s meeting would most likely be an extension of current production cut, noting that there was a need to firm up the prices such that oil would remain above $60 per barrel.Urging Nigeria to support a policy that would make price favourable, particularly for budget implementation, Fawibe said large producers like Russia and Saudi would likely agree to cut in production.
The oil estimate for the budget is too optimistic; Nigeria’s quota cannot be up to 2.2 million barrel per day, Diran said. He however advised the country to work towards producing condensates, since the OPEC production cut does not include condensates. This, Diran said, would shore up production level and increase revenue.
Imo State Governor Emeka Ihedioha, meanwhile, has warned that the “the days of crude oil are numbered.” He made the disclosure in Owerri, the state capital, during the Ahiajoku festival, which traditionally ushers in the harvest season.Urging Nigerians to “as a matter of urgency prepare for life after crude oil,” the governor stressed: “Till date, palm oil remains one of the most important cash crops in the region and it could serve as a major driver for economic development.”