Nigeria needs fiscal and monetary adjustments to a new normal of cheap energy, as technological innovations in shale are expected to put a dampener on crude prices for a while.
Analysts say there is a need to unify the exchange rate and that the country has to build up its reserves.
“Between 2008 and today, almost every oil producer globally has replenished their reserves,” said Bismarck Rewane, chief executive officer, Financial Derivative Company, at a BusinessDay conference on the impact of falling oil prices on the Nigerian economy, held yesterday in Lagos.
According to Rewane, Nigeria’s excesses crude account (ECA) has depleted to $2.1 billion from $22 billion in 2008 while Forex reserves also fell to $37 billion today, from $53 billion in 2008.
“The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” said Godwin Emefiele, Governor, Central Bank of Nigeria (CBN) in an address to journalists, during the presentation of the Monetary Policy Committee (MPC) report in Abuja.
The poor fiscal position of the Nigerian Government and most sub national entities or states, comes amid a 30 percent decline in oil prices since June 19.
The fiscal situation in the country is not good, “five states cannot pay salaries as we stand today”, said Rewane. “Oil price volatility has affected Nigeria over the years, with the economic distortions becoming greater,” he added.
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“Nigeria needs to raise tax revenues, Nigeria has the lowest tax rate in the world with 5 percent Value added tax (VAT) – with 10 percent being the standard globally,” Ayo Teriba, CEO of Economic Associates said at the conference.
“We need to overhaul the country’s fiscal expenditure, fiscal policy needs to be more active,” Teriba added.
The Minister of Finance, in an attempt to protect and insulate the Nigerian economy from the volatility of the global crude oil prices, announced the first tranche of fiscal austerity measures, cutting the 2015 oil benchmark from $77.5 to $73 per barrel.
In as much as this measures on budget cuts are in the right direction, fiscal measures are not necessarily sufficient to insulate the Nigerian economic from the global oil decline.
Combinations of both fiscal and monetary policies are more likely to go a long way in stabilising the economy amid declining oil prices, analysts say.
According to Rewane, adjustments are either voluntary or involuntarily, with Nigeria often doing more under involuntarily adjustments.
“All our institutions are virtually bankrupt, the civil service which is the institution that makes other institutions work is not working effectively,” added Mansur Ahmed, director, stakeholder relations and corporate communications, Dangote Group.
The Federal Government’s revenue as percentage of gross domestic product (GDP) stands at 12.2 percent, which is low, compared to other oil producing countries.
Despite Nigeria having the largest economy in Africa, countries like Angola, Algeria, South Africa, Morocco and Egypt all have government revenue to GDP above 20 percent, with Angola having the highest of 41 percent.
“Nigeria’s FX reserves are lower than its five year cumulative inflows of dollars from portfolio investors,” said Rewane.
“Meanwhile reserves currently fund 97 percent of short term liabilities. For EM peers, it is typically 300 percent,” Rewane said.
Nigeria has been grappling with dwindling revenue as the price of the Organisation of Petroleum Exporting Countries (OPEC) basket crude had fallen to $77.27 below the country’s 2013 budget benchmark of $78 a barrel.
Laoye Jaiyeola, supervising director-general of the Nigeria Economic Summit Group (NESG) said that part of the fiscal adjustments should include the cutting of salaries and allowances of public officials.
“We should address how to bring down costs of governance. We should cut expenditure on areas we do not need,” Jaiyeola said.
The National Assembly’s N150 billion budget is equivalent to 3.02 percent of the 2014 fiscal budget of N4.96 trillion.
BALA AUGIE, JOSEPHINE OKOJIE & DANIEL OJABO
