• Thursday, March 28, 2024
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BusinessDay

Sailing through the deep blue sea of COVID-19 pandemic – Bold reforms non-negotiable

Oil

The combination of the March OPEC+ kerfuffle and the coronavirus pandemic resulted in an oil price drop so severe that some traders paid buyers to take oil off their hands in April. Many analysts believe this shock may trigger a deep recession in many countries, including Nigeria, which relies on the commodity for the bulk of its revenue, Federation Account Allocation Committee (FAAC) to sustain activities in the states. This monthly bazaar is a symptom of the country’s oil dependency. These allocations are controlled by the movement in oil prices which showed the vulnerability of public revenue to global oil market developments.

The volatility of oil prices has recently been worsened by a supply glut due to low demand occasioned by the lockdowns that have occurred in the wake of the coronavirus pandemic and price war among some of the oil producers. This led to the drop in the revenue shared by the FAAC. For instance, revenue dropped to ₦581.566 billion in February 2020 from ₦647.353 billion in January. The country escaped the downturn at the start of March as the lockdown only started grinding economic activities to a halt from the middle of the month before COVID-19 struck. March’s allocation “rose” to ₦780.926 billion as almost all components of revenue including VAT, gross statutory revenue, Petroleum Profit Tax, Companies Income Tax, Import and Excise Duties, Oil and Gas Royalties, rose. Some may point to the FAAC “rise” in March, but the devaluation of the naira between February and March effectively gave the FG more naira to spend.

As context, Nigeria recorded 1.419mbpd in August 2016 during the throes of the last recession. Average crude oil lifted in 2016 was 1.62mbpd and 1.83mbpd in Q3 and Q4, respectively. At the beginning of this year, the country was producing 1.8mbpd, but recently, about 70 percent of April loading cargoes have yet to find buyers. Some March cargoes remain unsold and with the agreed cuts under the OPEC+ plan, the country is effectively selling below 1.2mbpd at $12 per barrel.

Nigeria may still be in trouble even as many countries have started opening their economies to business amidst fears of a second wave of coronavirus infections. From all indications, Nigeria will earn little from crude oil this year, which brings to fore how untenable its current economic arrangement is. It’s likely to experience a significant revenue shortfall throughout 2020, with the worst yet to come. FAAC numbers for February might represent the are beginning of this new normal.

Nigeria’s total oil earnings in 2016 were ₦3.5 trillion compared to a ₦9.72 trillion projection. At the period when the country witnessed the height of the last recession that made people lose over a million jobs, the FG share of oil revenue was only ₦697 billion, an amount not enough to meet its personnel cost of ₦1.6 trillion. This was despite the currency devaluation that allowed the FG to squeeze in some exchange rate gains. Now, the pandemic has brought international trade shuddering almost to a complete halt meaning that even So, the tariffs on imports that necessitated Nigeria closing its land borders will rarely come in.

Nigeria is about to face a worse situation that can only be compared with 2016 when 33 states could not meet recurrent expenditure obligations without resorting to borrowing and 26 states could not pay salaries. It is necessary that the monetary and fiscal authorities quickly put together a financial support programme for the “working poor” especially frontline health workers before everything falls apart. Most health workers in Nigeria are under the employment of state governments, who, aside from Lagos and probably Ogun, rely on funds from FAAC to pay their workers including those in the health sector. Going by the situations, states cannot continue to depend on a federal revenue sharing mechanism from ever-dwindling sources.

The Minister of Health Minister, Osagie Ehanire, in late March, said 40 health workers tested positive for the coronavirus.

Nigeria needs to take advantage of this present global challenge and do what it should have done two decades ago; cutting down the size of government, reducing the Exclusive Legislative List, privatising the ports, pushing judicial reforms, passing the remaining parts of the PIB, enacting sensible regulation in power, mining and agriculture. The country’s precarious middle class was also left out of all the government’s interventions, which targeted key economic sectors and some sections of the very poor. That demographic makes up much of the country’s consumer spending. A plunge in their income will tip enough sectors into the red to guarantee a recession.

The CBN needs to empower Big Finance to lend at friendly rates to small, medium and big businesses. This effort would go a long way to control the bleeding of many working-class and professional jobs. All of this will require more borrowing, which will be justified if results on the ground stand as evidence. If the CBN can put together a ₦1 trillion bailout package for big businesses, then there should be a serious conversation in this country about what we are going to do for our health workers and the middle class.

Whichever way Nigeria survives this crisis will largely depend on getting those answers right.