Rising oil prices may increase Nigeria revenue, but impact may be little
By Oludare Mayowa
Against the backdrop of the rising global oil prices, Nigeria is expected to earn more revenue from crude exports than it had projected in the 2021 budget and this could lead to improve current account balance.
With the global oil price surging above $71 per barrel due to a number of occurrences, the nation is expected to exceed its benchmark earnings in the budget.
Reports showed that global oil prices continue to surge above $71 per barrel after Saudi Arabia’s largest and most protected crude facilities came under missile attack from rival Iran-backed Yemen’s rebels.
Apart from the impact of the attack on Saudi Arabia’s oil installations, a meeting of the OPEC+ last week also decided to extend the production output cut agreement till April.
This means members of the Organsation of Petroleum Exporting Countries (OPEC) and their allies would stick to their production quota in a bid to stabilise the oil market and ensure that prices remain at reasonable level.
Many analysts have projected a further rise in oil price to around $80 per barrel in the months ahead all things being equal and members of the OPEC+ are faithful to the pact.
Nigeria had set its earnings from crude oil export at $40 per barrel in the 2021 budget, which have an estimated N13.08 trillion expenditure and over N5 trillion inbuilt deficit.
With the surging oil price, Nigeria is expected to earn more revenue from the differentials between the benchmark and prevailing global price.
Nigeria’s crude and condensate production slumped to around 1.79 million b/d last year from 2.04 million b/d in 2019, according to S&P Global Platts estimates.
However, the downside is that Nigeria has to balance its earnings with the low production, which has hovered around 1.5 million barrel per day as a result of the need to comply with the OPEC+ production quota.
President Mohammadu Buhari had said in January that the country is being squeezed to produce at 1.5 million b/d against a capacity to produce 2.3 million b/d.
The present production level by Nigeria is lower than the volume approved in the 2021 budget, though the shortfall can be compensated for by the production of condensate which is not included in the OPEC+ production quota.
Again, Nigeria is still far from optimising the potentials from its production capacity, which eventually may reduce the benefits to be derived from the higher oil price in the international market.
The chief executive of a multinational firm told one of our correspondents that in spite of the rise in global crude oil prices, the nation is battling to balance the volume of production and price increase, resulting in less accretion into the forex reserves.
The CEO projected that Nigeria may be under pressure to balance its book with the expected additional earnings above the set benchmark, which could erode expectations of possible savings of the excess earning in ECA.
Asides from the huge budget deficit, which the government may be tempted to cover with the increased forex earnings from the rising oil price, Nigeria is also in a dilemma on how to handle the issue of fuel subsidy in the face of the surging crude oil price.
For instance, Nigeria took the opportunity of the low crude oil price in the wake of the Coronavirus pandemic last year to deregulate the downstream petroleum sector.
This simply means that the government policy would ensure that market forces determine the pump price of fuel consumption locally against that previous arrangement where the government pays the differential between market price and pump price as subsidy.
However, with the surging crude oil price, the government has been unable to adjust the price of petrol consumption locally due to pressure from the labour unions and the fear of backlash from the already impoverished populace.
It is reasonably expected that the state-oil firm, Nigerian National Petroleum Corporation (NNPC) may be forced to resort to price recovery mechanism if the government could not summon the political will to adjust the pump price appropriately.
This, analysts said could eat further into whatever gains that would have been recorded in the higher oil prices and earnings above the benchmark.
Although, there is pressure from the analysts and economists on the government to increase its saving in ECA and investment in the sovereign fund, this may be farfetched due to conflicting demand on the government finance.
Also, expectations are high that state governors, who are financially pressed in the face of dwindling income due to the impact of the pandemic may pressure the federal government to share whatever accrued into the federation account rather than saving the excess in ECA.
In the time past, many of the state governments had dragged the federal government to court as a result of the decision of the government to save part of the oil revenue in ECA.
Regardless of the augument on the potential benefits of higher global oil price on Nigerian economy, it’s important that the country find a middle course to balance its current account and ensure it spend less forex than it earns.
The foreign trade good report released by the National Bureau of Statistics (NBS) on Tuesday is an indications that the country may need to adjust its economy to be less reliance on crude oil exports for forex earnings.
The NBS report showed that Nigeria’s trade deficit stood at N7.37 trillion in the 12 months to December 2020.
The data showed that the total value of imports in 2020 stood at N19.90 trillion compared to N12.52 trillion imports in the same year.
This means that the country imported more goods and services than total exports last year.
Analysts said the government should increase support to the non-oil sector to boost exports rather than continue to depend on oil exports for about 90 percent of its foreign exchange earnings, which is detrimental to the overall health of the economy.
The sad thing about the data released by the NBS is the fact that Nigeria import more agriculture products last year, which can ordinarily be produce locally.
Experts believed that the reason Nigeria’s agricultural sector is declining can be situated in the growing insecurity across the country and the unresolved conflict between farmers and herders, which has caused disruption in the agricultural productions value chain in recent time.
Government needs to up its game in fighting insecurity, including the emerging banditary, insurgency, kidnapping by some herdmen and killing by cultists across the country.
For Nigeria to ensure economic stability, efforts should be intensified to do all that is possible to restructure certain sector of the economy to ensure that the gains from higher crude oil prices are not fritered away like it was done previously.