Five issues that will shape Nigeria’s economy in 2017

Crude Oil price

There is a growing consensus that crude oil pric es will average US$55 in 2017. Brent Crude, which Nigeria’s crude oil is benchmarked against, prices closed at US$56 on Friday December 29, 2016, the last trading day of the year.

It was the highest annual gain recorded by the commodity since 2009 after dropping to a low of US$27 in 2016. A US$55 per barrel average price in 2016 will be an average of US$13.5 above Nigeria’s benchmark price of US$42.5 as used in the 2017 budget. The positive outlook for crude oil prices is because of an agreement reached by OPEC in late 2016 to cut output for the first time in nine years. OPEC was also able to reach agreement with non-OPEC members like Russia, which also agreed to cut output. In all, about 1.2 mbpd of crude oil are expected to be taken-off the market.

This agreement came into effect on January 1 and already, key OPEC members like Saudi Arabia and Oman have informed buyers of their crude that they will be cutting supply by as much as 5%. Due to disruption in crude oil production caused by militant activities in the Niger Delta, which resulted in Nigeria producing an average of 1.5 mbpd in 2016, the country was exempted and has actually been allowed to pump production to its OPEC limit of 2.2 mbpd.

So unlike other OPEC producers, which would have to cut production, Nigeria can actually boost production in 2017 to take advantage of the expected higher crude oil prices. At an average price of US$55 per barrel, analysts at Financial Derivatives Company (FDC) forecast that export earnings will rise by 33 percent to US$46.2 billion in 2017 from an average of US$34.7 billion in 2016. This would translate to extra crude oil earnings of US$11.7 billion in 2017.

But revenues accruable to the Federal Government are expected at US$14.8 billion (N4.5 trillion), which would be more than twice the N1.98 trillion projected as oil revenues in the 2017 budget. Based on an average crude oil price of US$55 per barrel and an average crude oil production of 2.0 mbpd, Nigeria’s projected crude oil revenue of N4.5 trillion would represent 92% of 2017 revenue projections of N4.9 trillion and would be enough to finance 62% of the country’s N7.3 trillion 2017 expenditure plan.

A higher than budgeted crude oil price in 2017 would therefore have a significant positive impact of government’s finances in 2017. But if crude oil prices slip, then the country will have to solely depend on non-oil revenues resources, which are currently constrained by declining output, and also borrow to boost revenues.

Dollar availability

The biggest challenge faced by businesses in Nigeria in 2016 was inability to have access to enough dollars, whether to import raw materials for their manufactured products, buy needed equipment or pay for the services of foreign technical partners or services. Faced with a steep decline in dollar inflows, the Central Bank of Nigeria (CBN) was forced to ration the available dollars in its reserves. Data from the CBN shows that despite the rationing, the country’s external reserves were still down 11.7 percent to $25.72 billion by December 28, from $29.13 billion a year earlier.

But there is good news. There has been a consistent rise in the country’s external reserves since November 7, 2016 from about US$24 billion to close the year at US$25.72 billion. This represents a rise in the reserves of US$1.72 billion in about two months; this is despite the fact that within the period, the CBN sold about a billion dollars in a special auction to manufacturers and fuel importers. The boost in the country’s external reserves is due to a rise in Nigeria crude oil production to 1.70 million barrels per day (mbpd) in November, up from 1.65 mbpd the previous month. This boosted crude oil earnings and positively impacted on reserves.

This means that there will be increased dollar availability in 2017, if crude oil prices stay above US$50 and Nigeria can sustain production at between 1.9 to 2.0 mbpd. The expectation is there will be increased dollar availability in 2017 for businesses but not enough to meet all their demands. However, the pressure on the unofficial market, which has seen the dollar sell at almost N500 to the US$ will be reduced and probably see the dollar settle closer to N450 unofficially. The official exchange is expected to remain pegged at N305 to the US$ as contained in the 2017 budget, as President Buhari has indicated that he would resist any attempt to further devalue the currency.

Deregulation of fuel prices President Buhari has also indicated that he would resist any attempt to deregulate fuel prices, despite the fact that at an average crude oil price of US$55 per barrel, the landing cost of a litre of Premium Motor Spirit (PMS) is now about N200. This means that the Federal Government, most likely through the Nigerian National Petroleum Corporation (NNPC) would have to bear a subsidy cost of about N55 per litre for most of 2017. At an average fuel consumption of 30 million litres per day, this would come to about N1.65 billion daily and N602 billion in 2017. Since the government has not budgeted for subsidies in 2017, this loss would have to be solely borne by the NNPC, which will show it in its books as losses in 2017.

This means that any hopes of NNPC returning to profit in 2017 are no longer possible. The reluctance to do away with subsidies also means that the NNPC is likely to end up as the sole importer of the product this year, raising the risk of the country seeing a return of the fuel queues that became a common sight before the government raised fuel prices in May 2016. If at some point, the government finds it unsustainable to subsidise fuel price, then Nigerians will likely see a steep rise in the price of the commodity and a return on inflationary pressure that could see inflation rise into high double digits this year.

Power sector pricing reforms An unresolved challenge facing the Nigerian power sector is market reflective tariff. Another way of saying a pricing of power consumption in a way that allows providers of power to recover their cost of operation. Current average price per kilowatt of electricity consumed is N45 but sources in the power industry claim that a cost reflective tariff will be anywhere between a N100 per kilowatt and N120 per kilowatt. The economic assumptions contained in MYTO II (Multi Year Tariff Order) based on which the current power tariff was set has since been overtaken by new realities. Two of the key assumptions of MYTO 11, an inflation rate of 7.9% and an exchange rate of N166.15 are no longer realistic given the current inflation rate of 18.5% and official exchange rate of N305 to the US$.

This has led to calls by players in the industry for the whole MYTO pricing structure to be discarded, as it no longer represents the reality in the industry. But following the significant resistance that occurred over the February 2016 increase in tariffs, which many argue has not been followed by any significant increase in power supply, there is little political will to push for further increases in power tariff. However, without an adjustment in power prices, the sector will continue to struggle.

The most likely scenario is for the government to push for an increase in power supply and try to attain some level of stability before agreeing to a tariff hike. The chances that it will happen this year are slim. But if it happens, then expect to see another cost push impact on inflation in the year, which will be a significant burden for a hard-pressed Nigerian population.

Petroleum bills The Senate concluded public hearing on the Petroleum Industry Governance Bill (PIGB) just before they went on recess in December. This has raised expectations that the PIGB will be passed before March this year and possibly signed into law latest by June this year. Meanwhile, the ministry of petroleum resources is also said to have submitted three other bills covering the fiscal framework, host community fund and governance framework for the oil and gas industry to the House of Representatives.

This signals that the endless wait for a proper and modern law to guide petroleum exploration in the country will most likely end this year when all these bills are debated and passed. The absence of clear laws guiding oil and gas operations in the country has been blamed for a sharp decline in investments inflow into the oil and gas sector.

Sources in the industry say as much as $15 billion in annual investments have been put on hold in the sector due to the uncertainty over the laws guiding operations in the sector. If these laws are passed this year, it will spark a significant revival in oil and gas activities in the country.

Peace in the Niger Delta

The bigger puzzle for the government is how achieve peace in the Niger Delta in 2017 as this will have a direct impact on crude oil production and consequently government revenues. As shown in earlier analysis, if the government is able to achieve 2.0 mbpd per day in crude oil production, revenues from crude oil would more than double to N4.5 trillion this year as against the estimated N1.5 trillion lost to restiveness in the Niger Delta in 2016.

The lull in attacks in the region in the last quarter of 2016 saw oil production jump from an average of 1.4 mbpd to about 1.7 mbpd, resulting in the country’s external reserves adding about US$1.7 billion from November to December.

Sources in the oil and gas industry have called on the government to pursue dialogue with more intensity, as use of force is not likely to resolve the attacks on oil and assets and will be costly to sustain. However, there are strong indications that the attacks on oil assets will not be as bad as witnessed in the 2016 due to increased security in the region, which would stop the opportunistic attacks that was rampant in 2016.