A bleak future without petrodollars is something Nigeria has been warned about for years, yet the day of reckoning has caught the government unprepared and scampering for a way out against the odds.
The times have rapidly changed for Africa’s largest oil producer facing a “double whammy”, as the minister of finance, Zainab Ahmed, put it during a dialogue session Tuesday, of tumbling oil prices and the coronavirus pandemic.
The Finance Minister was blunt in expressing the hard economic realities facing the country as she rolled out a forecast of dismal economic indices for Nigeria at the dialogue session.
First, the government expects GDP to contract by 3.5 percent this year. That’s significant for two reasons. Not only is it going to mark the country’s biggest economic contraction since the 1980s, it’s the first time the Nigerian government is less optimistic about its economy than independent economists and the likes of the International Monetary Fund (IMF).
Though still in the same ball park as the IMF’s forecast, the government’s growth outlook is actually worse than the Fund’s 3.4 percent estimate.
Another staggering statistic that emerged from the government’s stables was that oil earnings were now projected to decline by a staggering 90 percent.
The government also estimates net oil & gas revenue available for Federation Account Allocation Committee (FAAC) distribution will fall by 80 percent to N1.1 trillion from the previous estimate of N5.5 trillion.
Again, the government’s outlook is much worse than the IMF’s forecast that oil revenues will decline by 48.6 percent or $26.5 billion this year, down from $54.5 billion in 2019, according to the IMF.
Nigeria started this year projecting it would sell oil at $57 a barrel, then it revised that down to $30 a barrel, and now $20 per barrel. Importantly, oil production is also now projected at 1.7mbpd (vs. 2.18mbpd previously indicated). Analysts say this is perhaps the most conservative oil production estimate in years.
For Nigeria, the chicken has come home to roost,” a former senior government official told BusinessDay.
“We had always known a time like this will come, the handwriting was always on the wall. But we didn’t do the right things. I hope this unprecedented crisis finally serves as the trigger to get our acts together,” the person said.
Nigeria’s plight is playing out across the world: from Venezuela to Iraq and Iran, petrostates that are grappling with the same bleak future – one where their prized commodity is worth much less than it was, and where private companies often still want their cut.
While headline Brent-crude futures have rallied sharply in the past few weeks, rising above $30 a barrel on Tuesday, a glut of Nigerian oil is fetching about $10 less than that. It’s a level that means fiscal revenue for the continent’s biggest economy has collapsed.
That has several implications for Nigeria which depends on oil revenues to fund half of its budget and to earn a sizeable chunk of its foreign exchange. Most of its states also depend on federal allocations to pay their bills from worker salaries to infrastructure projects.
“It’s now dawned on everyone across the country how severe this threat is,” said Andrew Nevin, a partner and chief economist for Nigeria at PricewaterhouseCoopers LLP. “There is a possibility that at least for three to five years, there’s going to be no revenue flowing to the government from oil.”
Another rising concern in Nigeria, according to analysts quoted in a Bloomberg report, is that a period of economic distress could lead to a return of social unrest that dogged the country as recently as 2016.
The Niger Delta, at the heart of Nigeria’s crude production, has suffered bouts of militancy and violence for years, with oil facilities targeted by people claiming they were unfairly treated by the government and big oil companies.
Nigeria’s worst outcome would be that its prices stay low and production is reduced by renewed unrest.
