5 reasons $71 oil price is not enough to boost Nigeria’s economy

Positive crude oil prices since the Organization of the Petroleum Exporting Countries (OPEC) projected increase in demand have raised hope of a better global fiscal performance after severe disruptions caused by COVID-19 that unsettled oil-dependent economies.

On Thursday, Brent, against which Nigeria’s oil is priced, grew by 1.57 percent to open at $71.70 compared to $70.25 per barrel recorded the previous day.

But despite the positive sentiments associated with rising oil price, it does not give room for much cheer for Nigeria, sadly, as the country’s fiscal position still remains precarious.

Most experts believe Nigeria must plan for life after oil and implement policies that can help boost non-oil revenue, because the possibility of another oil boom is waning, despite the benign outlook for oil prices.

Here are five top reasons Africa’s biggest oil-producing country should not celebrate the current bullish crude oil prices.

Addiction to an opaque subsidy

Although the rising price of crude oil has raised Nigeria’s hope of effectively funding its 2021 budget, it is currently in a dilemma as the landing price of petrol continues to rise, further burdening the Nigerian National Petroleum Corporation (NNPC), which has continued to shoulder the subsidy payment.

“The muddy subsidy scheme will erode any value-chain benefits for Nigeria’s economy,” Emeka Ucheaga, an analyst at EU Intelligence, told BusinessDay.

The government promised an end to fuel subsidies last year, but rising oil prices have complicated the effort, with the state oil company disclosing that it’s still negotiating with organised labour to find a way to allow petrol price to float without unduly harming the poor and working class.

In March, when Brent price averaged $63, NNPC said it was spending between N100 billion-N120 billion a month on petrol subsidies for consumers, a burden that is becoming untenable.

Stagnating oil production

Despite rising Brent prices, the diminishing pace of Nigeria’s oil fortune is threatening the economic health of Africa’s biggest economy as the country’s oil rigs hit the lowest in six years.

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Data obtained from Baker Hughes Incorporated and OPEC showed Nigeria’s oil rigs, which depict the level of oil production activities by operators, have reduced to five as of April 2021, a sharp decline from a three-year high of 30 rigs count recorded in 2015.

OPEC’s data also showed Nigeria’s oil production has slumped to an average of 1.58 million barrels per day in the last six years. From an oil production of 1.7 million bpd in 2015, the country now produces an average of 1.54 million bpd as of April 2021.

This is troubling as revenue is falling due to lower oil production, and a difficult environment that is reducing the capacity of businesses to pay more taxes.

Critics say the government has been content gorging itself on the country’s limited oil wealth and has stalled in aggressively seeking fresh foreign direct investment to provide adequate jobs for the people and entrench investment-led economic growth.

“It is not Uhuru yet. With what we are seeing, efforts should be made to raise non-oil revenues and maximise available resources to make up for the losses incurred from oil’s lag,” Ucheaga said.

Higher fiscal breakeven

An analysis by BusinessDay revealed as of today, Nigeria’s economy can attain a fiscal break-even position only if oil prices climb as high as $103 per barrel.

This was attained by incorporating the current official exchange rate at N380/$1, Federal Retained Oil Revenue to Gross Oil Revenue at 37 percent, Average Daily Production of 1.7 million barrels per day (OPEC quota), the current budgeted expenditure as well as budgeted non-oil + other revenue and unfunded revenue at N4.6 billion and N8.9 billion, respectively.

Over the years, the Federal Government has been known to exceed its budgeted deficit for the budget year, amid pessimism on the ability to even achieve its revenue target of N7.99 trillion in 2021 – the highest in the history of Nigeria.

With a N3.3 trillion budget for debt servicing in the assented 2021 budget, Nigeria’s Federal Government has been envisaged to spend about a quarter (24.3 percent) of the entire N13.6 trillion budget on debts.

This trend has been consistent since 2016. In 2015, N943 billion was spent on debt while N1.36 trillion was spent in 2016 and N1.66 trillion in 2017. In 2018, the government spent N2.23 trillion on debt servicing, while in 2019, it spent N2.14 trillion. In 2020, the government planned some N2.6 trillion on debt servicing.

As a result of this maladaptation, benefitting from the current oil price bloom becomes more of a mirage than a reality.

The implication of the above is premised on the fact that if oil prices do not meet the $103-per-barrel threshold, the government would continue operating at a deficit that would have subsequent fiscal ripple effects.

A fast-rising population

For most economists, Nigeria remains “Exhibit A” of the so-called resource curse, particularly when you split its oil production across the population.

Despite huge oil reserves, Nigeria has the 19th lowest production per capita among top 20 oil-producing countries in the world; the country produces less than a barrel per 100 people. Only China produces lower due to its population of 1.4 billion people.

Saudi Arabia produces about 28 barrels per 100 people, Kuwait produces 60 barrels per 100 people, while UAE produces 32 barrels per 100 people.

Although Nigeria produces the most oil in Africa, it also underperforms its African peers with regard to per capita production, producing less oil per person than Angola and Algeria.

“Instead of increasing oil production or cutting waste and leakages, Nigeria racks up debt to replace oil revenues,” Damilare Asimiyu, head, Research and Strategy at GTI Capital, said.

Government’s profligacy

Other experts say another challenge obstructing Nigerians from reaping the full benefits of the oil boom is the increasing cost of governance, as most experts complained Nigeria’s civil service remains bloated and its lawmakers still rank among the world’s highest-paid.

Despite President Muhammadu Buhari’s rhetoric during election campaigns, there has not been a clear attempt to reduce government waste, which will essentially free up more money to plug Nigeria’s infrastructure deficit, a necessity given population growth.

According to a budget document seen by BusinessDay, the office of the president plans to spend a total of N2.42 billion on travel and transport (local and international) in 2021. Refreshments, honorarium, and sitting allowance will gulp a massive N189.8 million, while the supply of materials such as office stationery, books, newspaper, magazines, printing and other similar expenses to the State House will cost N480.5 million.