Why higher crude oil prices won’t save Nigeria’s economy


Nigeria’s income from crude oil export has lately been boosted, fortuitously, by an 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 and $70/barrel this year.

The question, however, is whether the present over 50 per cent rise in crude price and export dollar earnings will also trickle down to increase consumer demand and trigger an expansion in the manufacturing and agro-allied industries. Furthermore, will such an expansion lead to the creation of more jobs and also reduce poverty?

These issues are examined, hereafter, in an interrogative format to encourage a simultaneous personal appraisal, by the reader. Please read on:

Question: Why are you pessimistic about the positive impact of crude prices rising above 50 per cent of the 2018 budget projection of $45/barrel? After all, such a huge windfall should provide the much needed revenue for funding the budget and should possibly also stop us from acquiring more debts, with recklessly high rates of interest for government’s otherwise risk-free loans?

Answer: 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 and 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 will be foolhardy, therefore, to expect any major transformation, when crude prices hover, relatively humbly, between $60 and $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 National Assembly members or the Federal Executive Council. 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 International Energy Agency January report, for example, predict more robust prices. Ultimately, the lower budget benchmarks wilfully adopted will invariably induce increased government borrowing to fund the deficits earlier projected 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 Council, without recourse to the legislature, to also spend additional earnings from the “Excess Crude Account”, even after loans had been obtained to fund the appropriated actual deficit for that year! Thus, the present excess revenue from crude prices ranging from $60 to $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, despite the availability of unencumbered excess foreign exchange, you cannot deny however, that the increased spending from both the loans obtained and the higher oil revenue will trickle down to stimulate consumer demand, and 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 per cent 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 a 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 per cent to invariably reduce the purchasing power of all income earners, and deepen poverty nationwide. Undeniably, however, low consumer prices (i.e. lower inflation rates one to three per cent) are certainly the surest way to alleviate mass poverty and social stress.

Furthermore, the procedure by which the CBN unilaterally determines naira exchange rate through market auctions of dollar rations is invariably monopolistic and transforms the apex bank 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 higher 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 a substitute, and the greater, therefore, will be the threat of inflation, and ultimately the higher, also, will be the cost of borrowing, as it is clearly irrational and non-businesslike 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 the National Bureau of Statistics last week.

Ultimately, if this contradiction subsists, and petrol price remains regulated, our ECOWAS neighbours will become the major beneficiaries of Nigeria’s heavily subsidised petrol price and if crude oil price further spikes, we may end up devoting over 50 per cent of annual budgets to petrol subsidy alone!

Incidentally, early in March this year, the Nigerian National Petroleum Corporation’s Group Managing Director, Maikanti Baru, who led a top management team on a visit to the Comptroller General of Customs, Col. Hameed Ali (retd.), lamented that detailed studies conducted by the NNPC indicated a strong correlation between the presence of frontier petrol stations and the activities of fuel smuggling syndicates.

The GMD also noted that 2,201 registered fuel stations in 61 local government areas in 16 states, which have contiguous borders with our ECOWAS neighbours, had a combined tank capacity of over 144million litres of petrol, i.e. about four times more than Nigeria’s daily average fuel consumption of just 35 million litres. Instructively, while Nigerians pay the regulated price of less than 50 cents per litre, conversely, the prevailing official petrol price in neighbouring countries is an average of $1/litre!

Consequently, according to Baru, the NNPC which is presently the sole importer of petrol, is currently incurring a daily subsidy of N774m from “the cost differential between the official regulated pump price of PMS and the actual cost of the commodity.”

According to the GMD, the corporation has already spent $5.8bn (almost one third of the 2017 budget) on a daily supply schedule of 50 million litres to combat “the fuel crisis that resurfaced since late last year.” Unfortunately, however, respite is inexplicably still out of sight.