Oil price drop shows why reforms are urgent

The price of Brent Crude has been on a downward trend, fluctuating between $50 and $55 per barrel in the last one week.

Nigeria’s budget benchmark for crude oil is $60 per barrel, which is beginning to look unrealistic in the new year.

Analysts believe that should Brent Crude trend lower than $50 per barrel, Nigeria may begin to brace up for 2016 crisis, which saw the economy go into recession and many firms exit.

Nigeria is a mono-product economy, relying on crude oil for over 90 percent of foreign exchange and 75 percent of revenue.

The current government has made a series of efforts to diversify the economy in terms of increased agric sector funding in rice production through the Anchor Borrowers Programme. However, this has not resulted in significant change in the economy as rice is just one commodity out of many. In terms of jobs, for example, unemployment rate rose to 23.10 percent in the third quarter of 2018 from 18.8 percent in the second quarter of 2018, according to latest date from the National Bureau of Statistics (NBS). The gross domestic product (GDP) growth in the third quarter of 2018 was 1.8 percent, which is lower than 2.11 percent reported in the fourth quarter of 2017.

An analyst pointed out that another reason why these activities have not impacted the economy is that some of the loans have not been repaid.

“For that to make impact, farmers must repay them and the loans must also be given to many more people. The cycles have to be repeated for it to make meaningful impact. Secondly, how much is the loans when compared with the GDP?” John Boazue, an economist, asked.

Nigeria urgently needs reforms in all sectors, with the next President likely to face worse economic scenario.

Countries like Ethiopia, Rwanda and Ghana are growing by 8.5 percent, 7.8 percent and 7.6 percent respectively owing to reforms carried out by their governments.

“It is exciting to see three African countries topping the list of world’s fastest growing economies, and seven among 18 fastest growing in the world. But it is also worth noting that these African countries, particularly the top three, are the liberalists and reformists on the continent. Reforms work,” Olu Fasan, international trade negotiator and visiting fellow at the International Relations Department of the London School of Economics (LSE), said on his Twitter handle on January 1.

Nigeria is still subsiding petrol, with $1 billion set aside for it in 2019 budget. This makes no sense to analysts, especially when the subsidy benefits only the middle-class and the rich that can afford cars and generator sets. Nigeria has 87 million people living below $1.90 per day. By assumption, these people cannot afford generators and cars, with their basic needs being food, shelter and clothing.

The country is also unable to sign the African Continental Free Trade Area (AfCFTA) agreement, which is easily the largest trade agreement since the World Trade Organisation (WTO) in 1994, targeted at creating a single market for Africa’s 1.2 billion people and exposing each country to a $3.4 trillion opportunity.

Experts say the AfCFTA will likely raise Africa’s nominal GDP to $6.7 trillion by 2030 if all African countries sign up.

The treaty will liberalise 90 percent of products produced in the continent. This means that a country that is bound by the AfCFTA can only protect 10 percent of its local industries.

Nigeria needs urgent reforms, as any hit on the Brent Crude could hurt manufacturers who need greenback to import inputs.

Manufacturers cut down on their local content in the first half (H1) of 2018, as domestic input sourcing fell by 4.12 percent due to manufacturers’ decision to look outwards for raw materials.

Data from the Manufacturers Association of Nigeria (MAN) show that local sourcing declined from 60.72 percent in H1 of 2017 to 56.6 percent in the H1 of 2018.

The 56.6 percent represents 9.1 percentage fall from 65.7 percent recorded in the second half (H2) of 2017.

“Local sourcing of raw-materials sourcing in the manufacturing sector slowed in the first half of 2018 with the exception of motor vehicle and miscellaneous assembly group. This may be adduced to the general sluggishness of the economy and a renewed ability for importation of raw-materials considering the tranquillity in the foreign exchange market,” MAN discloses.

This portends danger to the Nigerian economy.

South Africa, Africa’s second largest economy, earned 164.9 billion rand (about $13 billion) from exporting automobiles alone in 2017, according to the 2018 Automotive Export Manual.

Bangladesh, often regarded as one of the poorest countries in the world, rakes in $28 billion just from textile export annually.

In 2016/17, Brazil, with almost Nigeria’s demographic size (209 million),exported 28.15 million metric tonnes (MT), earning over $38 billion just from sugar.

Sugarcane alone contributed $43.8 billion to Brazil’s gross domestic product (GDP) – equivalent to almost two percent of the entire Brazilian economy. Even India, which was projected to grow as fast as Nigeria by the Goldman Sachs in 2012, is set to produce 35 million tonnes of sugar next year.

For Nigeria, data from the National Bureau of Statistics (NBS) show that the country earned N577 billion from total export in the first quarter of 2018 and N218.98 billion in the second quarter (if you factor out what the body calls ‘other oil exports’). This is about $2.20 billion for the half-year of 2018.

BudgIT carried out a simple research in 2016 using data from Indexmundi, the United States Department of Agriculture (USDA) and Vetiva Research. It was found that Nigeria had a 45 per cent share of world’s palm oil market in 1960. The numbers showed that if Nigeria maintained its 45 percent share in 2016, it would be earning $17.5 billion annually from just one product—palm oil— assuming that it exported all of its output. As of October 2018, one ton of palm oil was around $499.15, using Malaysian prices. Total palm oil output was 58.84 million metric tonnes. Assuming that Nigeria was still controlling 45 per cent of the global palm oil market last month, the country should be producing 26.48 million metric tonnes. Local demand is about 2.1 million metric tonnes, meaning that Nigeria would be able to satisfy local demand and still export 24.38 million tonnes, earning $12.17 billion

Today, the oil sector is yearning for reforms. Nigeria is yet unable to use its gas conformably, yet the Petroleum Industry Bill is not passed.

The transport sector, notably sea and rail movements, need urgent reforms. The non-oil sector needs reforms to bring in more foreign exchange. The stock market needs reforms after a string of losses in 2018. The insurance industry needs reforms to contribute more to the GDP. The education sector needs reforms to produce quality graduates that meet the needs of industry. The health sector needs urgent reforms to check outbreak of diseases and reduce high death rates in hospitals that look like glorified mortuaries, analysts say.

“The next president needs reforms more than ever before. The motto should be: Reform or die. This is why the next election should be about issues. We do not need a repeat of the 2016 experience, where oil price fall crashed the whole economy,” said Ike Ibeabuchi of MD services Limited.

ODINAKA ANUDU