‘Oil price fall underscores recurrent cost cut, subsidy removal’

With oil prices presently below $50 per barrel, economic managers and government officials have been challenged by stakeholders and analysts to go beyond rhetoric and move into decisive action to engender confidence in the economy.

The stakeholders would want government to respond to the current crisis by unlocking potential through the complete removal of subsidy on petrol, cut cost through reduction of salaries and political aides, so as to conserve funds for development.

The stakeholders further said that the current lower price of petrol in the international market has completely eroded the essence of the subsidies, which should therefore be stopped immediately, while the funds should be redirected for other growth projects.

For instance, in 2011 the sum of N1.4 trillion was paid as subsidy, while subsidy claims by the independent oil marketers amounted to about N2.5 trillion in 2012, N1.3 trillion in 2013, and N502 billion (out of a N971 billion approved budget figure) so far in 2014.

The recent reduction of the pump price of petrol to N87 per litre means that subsidy margin has shrunk  to about N0.80 per litre against N44.00, when it was N144 per litre.

Also, there should be consolidation of the three markets, interbank, Retail Dutch Auction System, (RDAS) and parallel market, to stem the current economic rent opportunities occasioned by the wider margins of between N25 and N30 existing among the markets.

Razia Khan, analyst with Standard Chartered Bank, London said that although government has commenced implementation of a scenario-based budget, where they are preparing for a number of different eventualities, indications are that further austerity measures could be introduced as more cuts in government spending are necessitated.

“Ultimately, this could spur the pace of reform, forcing the hand of the government on many beneficial longer-term developments:  rationalising the public sector, doing more to mobilise domestic revenue and cut tax loopholes, and moving even faster towards the establishment of a Treasury Single Account.

Read also: Insurers intensify push for retail space as oil price fall stifles opportunity

“While in the near-term, the measures may add to the perception of a growth slowdown, in the longer-term, the reforms would be beneficial to Nigeria.  So much of Nigeria’s potential has not been realised, because high oil prices hampered the pace of reform – it is time for that to change,” Khan said.   

She also challenged government on the import subsidy at the official forex market, saying, “Ultimately, the authorities need to think about whether an import subsidy – even for strategic industries – is really the best use of FX reserves.

“When oil prices are high, yes – this makes sense.  But when Nigeria’s current ac/c surplus switches to a deficit, which will be the case at current levels, then the replenishing of FX reserves will become very difficult.  Given the threat to FX reserves, policy might need to change,” she added.

Ayodeji Ebo of Afrinvest said, “To avert the impending fiscal crises, the fiscal managers need to take the bull by the horn, adopt a two pronged approach of generating more non-oil revenue, whilst also cutting government expenditures.

“This would involve blocking revenue leakages and unlocking more non-oil revenue lines (though this may require time to achieve beyond the current fiscal year). Hence, a policy geared towards a more optimal recurrent-capital expenditure mix should occupy the center stage.”

Bolade Agbola, executive director, Cashcraft Asset Management said, “As the price of crude oil goes down, the need to remove fuel subsidy becomes imperative. The price response of the deregulated diesel to crash in crude oil price by over 50% is worrisome .

“What we are being told is market forces do not work in Nigeria. The role of regulators and government in this regard is worrisome .Maybe its because we are so close to election and some people do not give a damn .

“No other time is ripe for fuel subsidy removal and cancellation of petroleum equalisation fund, so that petroleum product pricing could  reflect carrying cost.”

Opeyemi Agbaje, Senior Consultant/Chief Executive Officer, RTC Advisory Services Limited, in a paper, ‘Nigeria in an Era of Forced Economic Restructuring’, recently presented at the Financial Correspondents Association of Nigeria (FICAN) forum in Lagos said, ”The falling prices of crude oil in the international market has placed Nigeria in a situation where policy makers must restructure the economy.

“Whether government likes it or not, we will have to deal with the issue of the Nigerian economy. We would have to diversify the economy, reduce the size of government and increase investment in alternative sectors, whether we like it or not.

“The oil price is still falling and we don’t know where the exchange rate is heading to.”

Some analysts said at the weekend, that should the oil price fall below $40/pbl, it will most likely result into further official devaluation of the naira, plus increased pressure on forex demand-supply dynamics, as investors are more likely to sell down on their portfolios in a scramble for a safe haven.

Equities and fixed income markets will also suffer more losses as foreign investors (who control 59% of the equity market as at Nov-14) exit, and credit rating (which determines fixed income market patronage) drops.

John Omachonu