Of Higher Crude Oil Price and IMF’s Warning to Nigeria
The recent warning by the International Monetary Fund that the rising crude oil price could put Nigeria’s 2022 budget in jeopardy, captures the paradox of a country suffering amid plenty, reports Festus Akanbi
The rally in the crude oil price reached the rooftops last week when for the first time in several months Brent crude oil price hit the $123.7per barrel mark, while West Texas Intermediate (WTI) rose to $119 a barrel. The rise comes amid lingering concerns over supplies from Russia to propel crude to its highest level in two months.
Under normal circumstances, the surge in the price of the commodity should translate into prosperity for the citizens given the fact that higher commodity prices would naturally translate to more foreign exchange earnings.
However, in Nigeria, the reality is whatever happens in the international oil market will trigger a chain of economic challenges which usually turn higher oil prices into more pains and hardship for the citizens.
In Nigeria, a combination of the sheer incompetence of the managers of the nation’s oil resources, outright sabotage and lack of political will has put Nigeria at the receiving end of the volatility in the global oil market.
Already, the current hike in crude oil price has triggered an increase in the price of Automotive Gas Oil (AGO), otherwise known as diesel in Nigeria, with the average cost of the product selling for N780 per litre in some filling stations and as high as N790 per litre in some of them.
The high cost of the product is further exacerbated by the ongoing Russia-Ukraine war which has led to serious supply chain challenges.
Oil market analysts expressed the fear that crude oil prices may hit $125 per dollar before the middle of the month given the pattern of daily increases noticed throughout last week.
At the Mercy of Oil Vandals
Sadly, while other oil-producing nations are counting the gains of the rising oil prices, Nigeria remains at the mercy of oil thieves who cart away almost 30 per cent of the total oil produced in the country.
This was disclosed by the Chief Executive Officer of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Mr Gbenga Komolafe, who said that Nigeria lost about N434 billion (about $1 billion) to oil theft between January and March this year.
The huge amount lost to oil theft was disclosed the same day the Minister of State, Petroleum Resources, Mr Timipre Sylva, said international oil companies (IOCs) are leaving Nigeria because the environment was becoming too volatile for their operations.
Komolafe was speaking at the Iwereland Petroleum Communities Summit on the implementation of the Host Communities’ Development Trust in oil-producing Itsekiri communities under the Petroleum Industry Act (PIA) 2021 hosted by the Olu of Warri, Ogiame Atuwatse III.
The upstream regulator disclosed that only about 1.35 million barrels or 71 per cent of the 1.9 million barrels that Nigeria produces, all things being equal, get to the crude oil export terminals due to massive theft and pipeline vandalism.
Stressing that the challenge was hindering Nigeria from meeting her crude oil output capacity, Komolafe said out of about 141 million barrels of crude oil the country produced during the period, about nine million barrels were lost to crude oil theft.
Perhaps, the greatest threat to the nation’s 2022 budget is the issue of oil subsidy, which the International Monetary Fund (IMF) said is bound to worsen Nigeria’s financial position this year. It warned that with Nigeria’s fuel subsidy payout averaging N500 billion monthly, total expenditure on subsidy could hit a record N6 trillion mark by year-end.
The multilateral lender also revealed that a macro-fiscal stress test it conducted on the country showed that interest payments on debts in the country could amount to Nigeria using 100 per cent of its revenue to service debts by 2026 if not closely monitored.
IMF’s Resident Representative for Nigeria, Mr Ari Aisen made these disclosures while presenting the latest Sub-Saharan Africa Regional Economic Outlook, in Abuja.
He expressed worry that many African countries, including Nigeria risk sliding into critical debt servicing problems unless urgent actions were explored to significantly raise revenue.
Further x-raying the fiscal challenges, the IMF chief regretted that as an oil exporter, Nigeria was not only unable to take advantage of the current global high oil prices to build reserves, but was also confronted by low earnings due to the subsidy on petroleum products.
With N500 billion monthly fuel subsidy payouts, he noted that the country might end up with a record N6 trillion subsidy by year-end.
However, he raised optimism that the Dangote Refinery would reduce fuel importation when completed, thereby cutting down the subsidy burden.
In his contribution, the Director-General of the Budget Office, Mr Ben Akabueze expressed regret that vested interests had made the removal of petrol subsidy very difficult over the years.
“When you try to remove subsidy or raise tariffs, you get a summons, you see resolutions get passed, asking you not to,” he said.
According to Akabueze, when the executive arm of the government prepared the 2022 budget, it was with the understanding that the petrol subsidy would be removed but that somehow, that move was frustrating
Like IMF, Like World Bank
In its latest report on Nigeria’s economy, the global financial institution, the World Bank cautioned against the continued retention of the controversial policy, warning that fuel subsidy payments by Nigeria could significantly impact public finance and pose debt sustainability concerns.
The concern of the global lender was contained in its new biannual report known as Africa’s Pulse, where the World Bank said the increasing fuel subsidy puts the Nigerian economy at high risk.
It said Nigeria is projected to have a 3.8 per cent growth in 2022, adding that as an oil-dependent country, weak oil production hampers economic recovery.
The World Bank nevertheless warned that “Risk remains high on increasing fuel subsidies, which could weigh heavily on public finance and pose debt sustainability concerns.”
It noted that the high level of oil prices will affect countries that are shielding the impact on their consumers through fuel subsidies, such as Nigeria and Ethiopia, warning that the high cost of fuel subsidies, due to the increase in oil prices, may deteriorate Nigeria’s fiscal balance.
There is a Cause for Alarm
Despite the assurances from the government quarters that all is well, Group Executive Director, Cordros Capital Limited, Mr Femi Ademola, believed the fear raised by the World Bank is a very real one. According to his explanation, “When proposed in October 2021, the budget of N16.39 trillion had a deficit of N6.26 trillion which will be financed through debt.
In January 2022, the deficit was further increased by about N1.1 trillion when the National Assembly approved a budget of N2.55 trillion for fuel subsidy. The increase to N4 trillion now would result in an additional burden of at least N600 billion to the federal budget for 2022 and a reduction of the state’s share of federal allocation by the balance of N900 billion.”
He pointed out that most of the revenue gap would be financed by debt; thus, increasing the country’s debt burden in the face of reducing revenue accruable to the federation. This, according to him, will threaten Nigeria’s fiscal sustainability and put further pressure on prices and exchange rate stability.
He believed it is politically impossible to consider the removal of the fuel subsidy at this period, saying however that if the economy has a consideration, it would be a better decision to place the effect on the economy above political calculations.
Fuel subsidies have been in place in Nigeria since the 1970s. It began with the government routinely selling petrol to Nigerians at below cost. But most Nigerians were unaware that this was being done.
Fuel subsidies became institutionalised in 1977, following the promulgation of the Price Control Act which made it illegal for some products (including petrol) to be sold above the regulated price. This law was introduced by the General Olusegun Obasanjo regime to cushion the effects of the global “Great Inflation” era of the 1970s, caused by a worldwide increase in energy prices.
Between 2006-2018 Nigeria spent about N10 trillion (or $24.5 billion at the current official exchange rate of N411 = $1) on petroleum subsidies. In 2019 and 2020 about N3 trillion ($7 billion) was spent on subsidies.
Why are the Subsidies There?
The official reason for introducing oil subsidies was to minimise the impact of rising global oil prices on Nigerians. But other factors played an important role.
The period 1970-1979 was an era of subsidies in Nigeria. Virtually everything in Nigeria was heavily subsidised – education, health, electricity, water supply, air travel and even provisions or “essential commodities” such as milk, sugar, rice, wheat and beverages.
In the 1970s, Nigerians coined the phrase “national cake,” to depict a phenomenon whereby they felt entitled to government largesse.
Various administrations have unsuccessfully tried to remove fuel subsidies since the transition to civilian rule in 1979 but failed.