The decision by the Organization of Petroleum Exporting Countries (OPEC) to enforce full compliance by members on its production quota, is an indication that Nigeria’s economic situation will bite harder on the people in 2020 fiscal year as the federal government adjusts to the realities of dwindling oil revenue.
After the attack on Saudi’s oil facility, OPEC agreed to trim oil output by asking over-producing members like Iraq and Nigeria to bring production in line with their targets as the group strives to prevent a glut amid soaring United States production and a slowing global economy.
“A capping or reduction in Nigeria’s crude oil output is likely going to happen soon and this will impact the economy adversely considering the economic significance of the commodity,” Charles Akinbobola, energy analyst at Lagos-based Sofidam Capital, said.
OPEC and its allies have over complied on average with its agreed cut of 1.2 million barrels per day (bpd) as Iranian and Venezuelan exports collapsed due to sanctions. But some members, such as Iraq and Nigeria, have been producing above their quota.
Iraq has been pumping 4.8 million bpd in recent months instead of its target of 4.512 million bpd. Based on direct communication, Nigeria produced 1.91m bpd in August versus its target of 1.685 million bpd.
“I have had a series of meetings with the leadership of Nigeria and Iraq and they have assured me they will be faithful to their obligation,” Mohammed Barkindo, Secretary-General of OPEC, told Bloomberg TV. “There is no unilateral action that will be taken by both Nigeria and Iraq; I have been in contact with the countries.”
The OPEC’s ministers’ position was buttressed by Mele Kolo Kyari, group managing director of the Nigerian National Petroleum Corporation (NNPC), who said that “The current situation in OPEC is about market balancing”.
Read Also: Nigeria, Iraq boost OPEC output, Gulf producers keep output flat
According to Kyari, to achieve market stability, every OPEC country has to play a contributory role which will be beneficial to all members and this can happen through production cuts. This he described as necessary in order to avoid high production volumes and low value in returns.
Higher oil prices have often meant Nigeria, Africa’s biggest oil producer, can earn more in foreign exchange and fund its budget deficit. This is because oil accounts for 90 percent of Nigeria’s foreign exchange and 85.6 per cent of Nigeria’s total export.
In the 2019 budget, the projected revenue expected from the oil sector is about 52 per cent of the total revenue profile of the budget with federal government projecting about N3.73 trillion as oil revenues while N710 billion is expected from earnings in government equity investment in Joint Ventures.
Nigeria’s government is struggling to generate more revenue to finance its growing budget amid unreliable oil revenue. The country’s debt has grown more than 160 percent to N24 trillion in the last five years. Tax to GDP remains low at 6 percent, one of the lowest globally.
After a few years of massive spending to boost the economy following a 2016 contraction, Nigeria’s Senate approved a reduced budget for 2019 as the government struggles to meet revenue targets. The central bank has now stepped in to help support expansion, first with an interest-rate cut in March and thereafter by forcing leaders through regulations and penalties to give out more credit in an attempt to stimulate growth.
Despite averaging more than 7percent in the first 14 years of this century, annual growth in Nigeria’s economy, which vies with South Africa as the continent’s largest, hasn’t managed to top 3percent for the past four years.
President Muhammadu Buhari, who was re-elected in February, pledged to diversify his country’s economy, which depends on oil for 90percent of its foreign exchange, making it vulnerable to global price movements.
