Echoes of oil economy, policy issues hunt 2017

Crude Oil Production

Crude Oil Production

Whichever measure and whatever the optimism is that are attached to the 2017 budget implementation, the centre of attraction has returned to status quo – crude oil. But the measuring index has remained the quantity produced and price in the international market. It is indeed, a sustained challenge for the budget this year.

In the 2017 estimates, government projected higher earnings from oil, despite its uncertainty, ahead of non-oil sector. The reason is not far-fetched, as the trickles of the recessed economy have “wetted” productive activities. Yes, there is hunger in the land, as people can no longer consume the “usual” (basic things).
Budget Versus Oil Price

At the moment, the price of crude oil at above $54 per barrel is fair compared with budget benchmark of $42 per barrel, but the outlook still remains unsure. Again, production level, being relatively stable though below budget estimates is not only uncertain, but can be rated “high risk.”

The reason is that militants have issued a fresh “red alert” on their readiness to obstruct the production flow in 2017. As usual, they would soon make good their threats.

President Muhammadu Buhari, while presenting the 2017 budget, admitted that disruptions in crude oil production partly contributed to significant shortfalls in projected revenue in 2016.

The implications of the development are further production shut-ins and supply shortage. This will hit revenue target and budget implementation will definitely hit a snag. With the threats already issued (announcement effect), the price of crude oil is trending upwards on the back of speculations and positioning by oil traders.

Sadly, Nigeria is now a market maker without benefits. The vandalised installations yet to be repaired and ensuing supply level below Oil Producing and Exporting Countries (OPEC) quota to the country are the extant encumbrances. While prices are going up due to developments there is short supply to take advantage of it. Generally, it’s all about the 2017 budget outlook.
Budget Losses in 2017

With 15 days already gone this year, the nation is yet to record a change in oil production figures. In fact, the available figures from separate authorities are contradictory and dogged by controversy.

While OPEC- the oil producers’ cartel, said Nigeria’s output is 1.5 million bpd, the oil minister, Ibe Kachikwu, quoted 1.9 million at a recent event. Whichever, the difference between those figures in comparison with the 2017 budget benchmark is a cause for worry.

In the 2017 budget proposal, oil revenue re-emerged the major source of funding, ahead of the non-oil sector, with a projected 2.2 million barrels per day (bpd) at $42.5 per barrel.

The implications are that Nigeria has already lost huge revenues in 15 days of 2017 oil sales, with direct impact on the feasibility of the projected revenues in the budget, as well as implementation.

Going by OPEC figures, the country is currently lagging behind the budget benchmark by 700,000 bpd resulting to immediate shortfall of $38.5 million daily at $55 per barrel. For the 15 days, it is a total loss of $577.5 million.

On the other hand, the minister’s figure showed a short supply of 300,000 bpd, resulting to $16.5 million shortfall daily. For the 15 days gone, it’s a loss of $247.5 million. It is left to be imagined what either of these numbers would have contributed to the success of the 2017 budget.

Stakeholders’ Reaction
To make a difference in economic activities in 2017, a Research Associate at Economic Research Southern Africa, Nonso Obikili, has raised a challenge of credibility on the Central Bank of Nigeria.

In a report by Quartz Africa, he said: “Fiddling with the foreign exchange market is a recipe for economic collapse. The controls and multiple markets need to go and a properly functioning market without price controls needs to be implemented.

“The economy is at the lowest it has been in terms of confidence in a long time and needs something of a morale boost—a major reform in one of the sectors could be that boost,” he said.

Also, an analyst at SBM Intelligence, Cheta Nwanze, said the elusive political will is now needed to carry out crucial reforms, otherwise Nigeria will still hinge its economic stability on OPEC’s fragile production deal.

“But that’s not the only deal critical to Nigeria’s economy in 2017. To take advantage of higher oil prices occasioned by the OPEC agreement, Nigeria will also need to cut a deal with militants in the Niger-Delta to ensure its daily oil production target is met. In all, given the permutations, significant growth appears unlikely in 2017,” he said.

An Abuja-based development consultant, Jide Ojo, said government must not waste further time in negotiating with the Niger Delta militants, if it really wants to take advantage of the favourable prices of oil in the international market.

He said that while the 2016 budget, premised on zero-based budgeting was a novel process, it is yet to be perfected in 2017 plans, as it has been plagued by the issue of “padding” both by the executive and legislative arms of government.

“The late passage of the budget, which came into operation in May 2016, has necessitated the extension of the lifespan of the implementation by National Assembly to one calendar year and that means it will be operational till 2017 May.

“Perhaps, this encouraged the presidency to again submit the budget for the 2017 late (presented to NASS on December 14, while that of 2016 was presented on December 22, 2015.) This does not augur well for the country’s economy and is one of the lingering challenges the executive ought to have avoided. The President has said that 2017 budget will be zero-based like that of 2016. We are waiting.”

For a fiscal governance expert, Eze Onyekpere, the lack of a clear path for the resolution of the insurgency in the Niger Delta region will affect the realisation of the projection for oil revenue. “If the country could not meet the 2016 projection, without resolving the challenge, it is likely that the 2017 projection will not be met.”

According to him, beside the oil uncertainty, 2017 budget has other challenges, including the lack of clarity on whether the N565.1b recovered loot is already in the coffers or being expected, which should be clarified by the fiscal authorities.

He said if it is expected sum, it should not be made a revenue source, but should only be appropriated when it has already been realised through a supplementary appropriation. This, he said, is to ensure transparency, as well as reduce uncertainty in budget performance over the years.

But raising a concern on the feasibility of the estimates, he said it would have made more sense to use the actual figures of 2016, as a guide to the projections unless the circumstances and conditions have changed in favour of enhanced revenue generation.

He noted that it is surprising that non-oil revenue (company income tax, VAT, and federation account levies) is expected to be much lower than oil revenue at a period the Federal Government has expended much on diversifying the economy.

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