State of the Economy: Fuel Subsidy Removal Not Temporary
The entire global economy is facing difficult times and Nigeria is not insulated from that. But we can say that ours is not as bad as other countries. Nigeria faced two shocks simultaneously. First of all, there was the shock of the COVID-19 pandemic and then the crash in crude oil price and all of these were happening together. The crash in crude oil price meant that our revenue declined by more than 20 per cent. Oil export has remained Nigeria’s single source of revenue. However, the broader economy is fairly diversified. We have 91 per cent of the Nigerian economy that is non-oil sector and 35 per cent of our labour force are in agriculture. Agriculture contributes 22 per cent of our GDP, trade contributes 25 per cent, while oil and gas contributes just nine per cent. We have an Information Technology sector that continues to grow and today contributes 11 per cent to the GDP. So, if you look at the Nigerian economy, you will see that oil and gas is just nine per cent, while the rest of the economy and various sector makes up 91 per cent. The real GDP growth by sector also shows significant stability in ICT, transport, water, science as well as the arts.
GDP Growth Projection
The GDP growth that we attained in 2019 was 2.9 per cent. We were projecting 2020 to be much better than 2019, unfortunately we had the pandemic and the crash in crude oil price and from our projection we are seeing a negative GDP growth of 4.4 per cent. But if we are able to implement the economic stimulus that government had planned, you can moderate the contraction to as low as one per cent. But even looking at the movement from 2.9per cent to a negative growth of 4.4 per cent, it is a very wide gap. We have seen federal government’s revenue from N8.4 trillion down to N5.6 trillion. We are also incurring Covid-19 related expenditure which is a minimum of N500 million.
We have tried to amend our Medium Term Expenditure Framework and Fiscal Strategy paper, just to bring it up to current reality. We have a funding gap which was previously planned for $7.1 billion, now this has been increased to $13.3 billion. We had to change our crude oil benchmark price from N57 to a barrel to $28 per barrel. Also, we had to revise downward our oil production volume 2.1 million barrels per day to 1.9 million barrels per day. We also had to revise downward some of our non-oil revenue, specifically some taxes and customs receipts that are driven by trade. For the privatisation exercise, due to the current realities, most of the assets that we were trying to sell would not find good value or would not be able to find good market. We had prepared the 2020 budget using an exchange rate of N305 to a dollar, we since have changed that to N360 to the dollar.
Fuel Subsidy Removal
We also took advantage of the opportunity in the crash in crude oil prices to remove fuel subsidy. This would be saving us, in the first instance, N457 billion, which was provided for in the 2020 budget, before the amendment. Now, it is zero that is provided for. But what is not provided for in the budget perhaps also is the exchange rate differential, which is also another saving that we have. So, for fuel subsidy, the removal for us is not temporary. We used this opportunity to remove the fuel subsidy because the time was right and we don’t have plan to continue with fuel subsidy even when crude oil price changes to a point where subsidy is required. We are conscious of the fact that it had been a huge fiscal burden on us and we had been looking at a way out, we found a way and we have exited fuel subsidy. We are now allowing the market to determine the price.
Cost-reflective Tariff for Power Sector
We are working together with the distribution networks within the country to attain a full cost-reflective tariff for the power sector by 2021. This would be a gradual process and it is largely driven by the distribution networks rather than by government, because they are the owners of the network and all they have to do is to defend their service before the regulators.
Health Sector Intervention
The response has been very swift. The Nigeria Centre for Disease Control and the Federal Ministry of Health acted very quickly. The cases we have are still very low for Nigeria, compared to what has happened in some of our African countries, especially like South Africa and also compared to the United Kingdom and America. So, we are fortunate that the cases are still low. Nevertheless, it is still a case of concern to us and we continue to work to make sure that we are able to contain the spread of the virus. Our response have been people-oriented and our target is to protect our citizens’ lives, create jobs and improve growth in the economy. Nigeria is responding to this twin shock and the Economic Management team recognises the impact of this pandemic that we are faced with and we have just launched the Nigeria Economic Sustainability Plan, which was designed to provide immediate response to this double whammy that we are facing. There is a strong collaboration between the fiscal and monetary authorities. The healthcare system has a lot of shortfalls and we are working together to make sure that it is upgraded. We have set up a number of isolation centres and they are being managed very well. We are not overwhelmed by the number of people that are affected. The Nigerian economy is resilient and it is working very well in our favour because of our demography.
The informal sector itself has proven resilient and the private sector has continued to cooperate with government to anchor the stabilisation of the economy.
We also have access to external concessional funding which are low cost and longer tenor. We have a domestic market that is deep and we invite investors to consider investing in the Nigerian domestic market. The returns are good and attractive. We also have at this time, reasonably adequate reserves to weather external shocks. We have the World Bank negotiation on course. We are looking at the World Bank going for its board meeting on August 6th, for Nigeria’s approval. We have met largely all the conditions for the facility. We missed getting ready for the July board meeting, so we are now getting reading for the August board. We are on course and the amount that we are raising in the first instance is $1.5 billion for the federal government and around September or October, we are hoping to get the facility that is meant to support the state and the amount is between $1 billion and $1.5 billion.