LCCI, NECA Recommend Policy Options to Cushion Effect of Oil Price Slump

  • Say Nigeria may not be able to meet her debt obligation
  • Suggest equity financing, private infrastructure funding
  • Say $22.7 billion borrowing raises sustainability concern

Gboyega Akinsanmi

With a 50.69 percent slump in oil price per barrel between December 2019 and March 2020, Lagos Chambers of Commerce and Industry (LCCI) and Nigeria Employers’ Consultative Association (NECA) have proposed equity financing and private infrastructure funding, among others, as strategies to prevent Nigeria from slipping into grave economic contraction.

Also, the two foremost business associations – LCCI and NECA – have warned the federal government against going ahead with its plan to take additional $22.7 billion borrowing, which they say, will bring the country’s total debt stock to $108 billion if the National Assembly approves the request for additional foreign loan. The Senate had already approved the loan.

In separate conversations with THISDAY, Director-General of LCCI, Dr. Muda Yusuf and his NECA counterpart, Dr. Timothy Olawale expressed concern about Nigeria’s economic future amid steady crash in the price of crude oil since December 2019, suggesting policy options to cushion its effects.
The price of Organisation of the Petroleum Exporting Countries (OPEC) basket of fourteen crudes had slipped to $33.25 a barrel on Thursday, compared with $35.54 the previous day, according to OPEC Secretariat calculations.

From $67.31 per barrel in December 2019, oil price had dropped to $63.83 in January 2020; $56.21 in February 2020 and $33.25 as at March 31 with Goldman Sachs’ prediction that the price would crash to about $30 per barrel.

With this trajectory, the gradual slump in global oil prices had upset Nigeria’s 2020 appropriation plan premised on a benchmark of $57 per barrel, thereby compelling the federal government to seek an urgent review of the benchmark and most likely the budget size among uncertain economic future.
Disturbed by this global dynamics, LCCI’s director-general warned that the sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.

With the tumbling oil price, Yusuf added that a drastic reduction in the revenue of governments at all level “has become inevitable in the near time on the ground that oil revenue currently accounts for about 50 percent of government revenue and about 85 percent of foreign exchange earnings.”
He noted that the trend “will have grave implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy.”

To prevent Nigeria’s economy from slipping to recession, the director-general warned that additional $22.7 billion borrowing (if eventually approved) would bring the total debt stock to $108 billion, saying the capacity to service the current stock of debt raises serious sustainability concerns.
He said the growing national debt “is a cause for concern as the debt profile grew from N12.6 trillion in 2015 to N26.2 trillion in third quarter 2019, an increase of 108 percent. With additional $22.7 billion loan, it will bring the total debt stock to $108 billion. But state governments owe 15 percent of the debts.

“For instance, the debt service provision in the 2019 budget was a whooping N2 trillion; whereas the total capital budget was N2.9 trillion; this implies that the debt service commitment was 70 percent of capital budget allocation. Debt to revenue ratio was about 30 percent, which is also on the high side.”
He, therefore, urged the federal government to take appropriate policy choices to attract equity domestic and foreign private sector capital for infrastructure financing.

The director-general added that the federal government “should look beyond tax credit in its quest for complimentary funding sources for infrastructure. We should be looking more in the direction of equity financing. But for this to happen the policy and regulatory environment must be right.”
Also, Yusuf recommended that the federal government should deepen public private partnership (PPP) and public private dialogue should be deepened to harness quality ideas on how to manage this rather scary situation.

He equally counseled the federal government “to review the spending structure of government and the cost of governance. The ballooning recurrent expenditure, in the face of declining revenue is a cause for concern. It is also important not to respond to the situation in panic mode in order to avoid a disproportionate response which could do even more harm to the economy.”

Like his LCCI counterpart, Olawale lamented that the global oil price “has tumbled below the $57 on which the 2020 National Budget was premised. The scale of the reduction is eliciting unpleasant memories of 2014 and 2015 oil price downturn that largely pushed the country into recession in 2016.
“The fluctuation of the oil price is already threatening the National budget benchmark and overall revenue of the government for 2020, with consequential negative implication for the proposed capital projects and other critical expense heads.”

He warned that the oil price slump, if continued, would have grave implication for the Naira on the ground that oil revenue “is the major source of our foreign currency earning,” which would rupture the domestic economy if the federal government did not respond to the crisis with mastery.

By implication, NECA’s director general explained that a lower oil price “will affect the forex supply to the country and stability of Naira. That also has implications for the ability of the Central Bank to meet FX demands in the long term.”

Olawale, therefore, counselled the federal government “to provide leadership and direction in diversifying the economy. It is high time we insulate our economy from the perennial global shock in oil prices. The nation cannot hinge its destiny on the price of a commodity in which it has no control on the pricing.”

Specifically, he noted that there was now an urgent need “to deliberately create a roadmap for a rapid diversify of the economy away from oil. We need actions; the government needs to create avenues for more economic activities to happen like diversifying the tax revenue of the government beyond oil.

“You cannot expect to generate more non-oil tax without having an increase in economic activity, championed by the private sector. Obviously the significant plunge in oil prices will adversely affect our tax revenue as well as our external reserves used to stabilize the FOREX. So immediate concerns will be potential impact on forex, which might make devaluation more likely.

“If the scarcity of forex is mismanaged, it would adversely affect key sectors such as manufacturing and trading that are more dependent on imports. This can then have a rippling effect on other sectors similar to what happened in the 2015 – 2016 period,” NECA’s director general explained.

Olawale, also, challenged the federal government to put in place stringent measures aimed at ensuring fiscal discipline by cutting costs and executing projects, which according to him, would impact the domestic economy positively as a result of plunging oil price in the international market.

He explained that the shortfall in oil prices should not be a licence “to further mortgage the future of the nation with borrowing as the budget is already struggling under the weight of debt service. Government should resist the temptation to further tax the already over-taxed private sector.

“This will only further incapacitate the Organized Private Sector and worsen the already precarious unemployment situation in the country. Deliberate efforts should be made by government to seek ways to finance some of its infrastructure projects through private sector investments through PPP.

“While it is too early to predict if this initial slump in prices will be sustained long enough to have serious repercussions for the economy, but if it stays this low for a long while, it could plunge our fragile economy into a contraction (negative growth rate), which when sustained for three consecutive quarters, pushes us into a recession,” he explained.