While many analysts have warned of dire consequences for the Nigerian economy if oil prices continue to plummet, not much is being said about the opportunity it provides to exit the costly petrol subsidy programme that costs the country over a trillion naira every year.
In 2016, oil prices fell to less than $40 per barrel, combined with a lethal militancy campaign marked by the unprecedented destruction of oil and gas facilities, the economy slithered into a bruising recession whose repercussion are still felt nearly four years later. If Nigeria had announced an end to fuel subsidy programme, the pump of price of fuel would have seen only a marginal increase as crude oil has fallen.
In December 2018, oil prices again sank nearly 35 percent from four-year highs reached in October that year and were at their lowest levels in more than a year.
It was a clear indication that the agreement to cut 1.2million barrels per day (bpd) from global oil production by the Organisation of Petroleum Exporting Countries (OPEC) and non-members including Russia, was not going to lift prices leaving many oil producers scrambling. Nigeria did not also take that opportunity to exit the costly fuel subsidy programme.
Brent crude, the global oil benchmark, fell 3 per cent at $57.80 a barrel on London’s Intercontinental Exchange. West Texas Intermediate futures, the
U.S. standard was down 3.3 percent at $48.24 a barrel on the New York Mercantile Exchange. But the country’s petroleum sector administrators were not paying attention.
Again, Brent crude oil futures hit multi-year lows last Friday and were set for their steepest weekly decline in more than four years according to some analysts due to the spread of the coronavirus which has ravaged over 30 countries and has seen over 80,000 people infected leading to low crude oil demands from China who has shut many factories down to contain the threat.
Brent crude, which fell yet another 4 per cent on Friday, has lost over 12 per cent last week, putting it on track for its steepest decline since January 2016, analysts say.
Oil prices were down for a sixth consecutive day on Friday as a growing number of new coronavirus cases outside of China fueled fears of a pandemic which could slow the global economy and lower crude demand.
Yet the threat is still present and could get worse for the oil market which had already lost over 4 million barrels per day in demand from China alone according to Vitol, an international oil marketing company. Crude oil imports into the world’s top oil importer and key growth driver would be weaker in March than in February, because most of the February volumes had been contracted, set, and en route to China when the coronavirus outbreak put the brakes on fuel demand in the country, reports an online energy resource.
March could be the month with the lowest Chinese crude imports this year, also because some refiners typically schedule maintenance between the winter and summer fuel season. Saudi Arabia is said to be cutting its crude exports to the world’s top oil importer by at least 500,000 bpd in March because of a slump in refinery demand amid the coronavirus outbreak.
The implication for Nigeria is that a fall in oil prices will trigger a collapse in public revenue and will force the Central Bank of Nigeria (CBN) into experimenting with unorthodox approaches to manage the fiscal and macro-economic shocks to the economy.
As prices fall, the CBN is spending a fortune to prop up the naira, enacting eerie policies that wouldn’t even be progressive in the stone age, including foreign exchange controls while depleting foreign reserves and piling on debt.
But one pragmatic way to control costs and reduce pressure on the naira is to cut subsidies on power and petrol. They are taking an undue toll on the economy and the benefit does not even trickle down to the poor Nigerians they were purportedly created to serve.
“If oil prices keep going down, it affects our revenue and infrastructural development because there would not be much money for investments, so this is time to get out,” Ayodele Oni, energy analyst and partner at Bloomfield law firm said.
Oni also said that low oil prices have a potential to destabilise the economy because it piles pressure on the naira due to shrinking foreign exchange and if the government starts defending the naira, it could create problems for the economy.
For example, BusinessDay analysis showed that in 2018, the government spent N730.9 billion on what it called “UnderRecovery” according to NNPC data which is far higher than total budget of Ministry of Education (N651 billion), Ministry of Health (N356 billion), Ministry of Transportation (N267 billion) and Ministry of Agriculture and Rural Development (N203 billion) in that year.
This pattern was replicated in 2019 even as the government claimed it budgeted N350bn for petrol subsidies. The Buhari administration seeks to avoid the uncomfortable toga of the government that devalued the naira and raised fuel prices but it is sacrificing real economic growth and plunging future generation into bruising debt to maintain the façade of a stable naira and it looks like too great a price to pay for a listless legacy.
