Things are certainly not looking great economically for Nigeria at the moment. With Brent Crude selling for just a little above $30, Corona Virus taking a drastic toll on manufacturing, transport and social life leading to severe fall in the demand for oil from China (currently the world’s largest consumer of global crude), Germany and several parts of Europe, the renewed interest in America’s Shale oil, Nigeria’s economy, heavily reliant on crude over the last fifty years will definitely take a great beating in the light of these emerging realities.
The Nigerian annual budget is anchored on oil production volumes and the price of the commodity in the market. The 2020 budget is firmed around two key projections: a daily output level of 2.18 million barrels per day and an average rate of $57 per barrel. At the current rate of $32-$34 per barrel, Nigeria is losing 90% of the projected revenue and with recent reports that 50 oil cargoes belonging to Nigeria were unsold last Friday as demand continues to fall, it now becoming likely that neither the daily sales target nor the revenue target would be met in the foreseeable future.
Two recent developments are behind the catastrophic fall in oil prices. Number one is the outbreak and spread of the novel COVID-19 virus and the second, an ongoing price war between two major oil producers, Saudi Arabia and Russia.
The novel virus
The COVID-19 virus has disrupted global trading and social life of communities in Asia, Europe, Africa and America in a way many could not have imagined at the beginning of the year. Factories are shutting down in China and the production facilities are idle meaning that there is very little demand for any crude derivates in those factories.
In South Korea, religious gatherings are becoming less common after it emerged that many who attended an event organized by one of the sects in Seoul contracted the virus at the venue of the religious exercise. In Europe, schools are closing and it was reported earlier in the week that Italy may shut down its borders completely as it battles to grapple with the spread of the virus within its regions.
Football matches across Italy last weekend were played without the cheering spectators. At the Vatican, the Pope had to send an audio message to the faithful as against the traditional greeting from the window overlooking St Peter’s Square. In the UK, schools are shutting down while in America, there are serious discussions on whether or not to ban political rallies as the country prepares for the November presidential election that would pitch President Donald Trump against either a Joe Biden or Bernie Sanders. Whatever happens, recent reports in the American media indicate that fewer Americans are as enthusiastic about attending any of those rallies as they were four weeks ago. How would this affect the process of electing the next US president? We shall find out in the weeks ahead.
The overall implication is that the demand for public transport will continue to decline, outdoor events will become rare and people will just sit indoors and watch as things play out. In the meantime, oil-dependent economies will continue to suffer and more so, countries that rely on China for household and industrial goodwill also find the next few weeks tough. Sadly, Nigeria falls into both categories. More on these later.
The Russia/Saudi Arabia price war
The crash of oil prices in a manner never seen since the pre-Gulf war days is blamed on an ongoing price war between two former allies, Saudi Arabia and Russia over a Friday disagreement during an OPEC meeting where member countries brainstormed on further output cuts to stimulate prices as global demands continue to tank.
Saudi Arabia had favoured more output cuts but Russia rejected the proposition, arguing that it would give US producers the leverage to flood the market with Shale Oil. Russian representatives refused entreaties from members whose economies were facing severe threats as the pains of low demands bite harder. They (Russians) were adamant that any further cuts would only hand the advantage to the US Shale oil producers who require a going rate of $40/barrel to break even. Well, Russia‘s refusal to yield to the entreaties of member countries infuriated the Saudis who then announced a slash in price to their suppliers- chalking off $6 per barrel from their current supply rate leading to Monday’s cataclysmic fall.
It is hoped that a common ground could be found sooner than later as the current price war does more harm than good to Middle East countries who dominate OPEC. Continuing fall in price would definitely affect public services, social welfare, employment and other economic activities around the Middle East with grave implications for global security. The last thing anyone in the world wants right now is volatility in the region.
Back to Nigeria
At any rate, the immediate concern of this intervention is not what happens in the Middle East or whether another terrorist group would rise to create global tensions. For this writer, the most important issue at the moment is how Nigeria will be affected by these two external events.
A lot of analysts have predicted that it could take weeks and months before a common ground is reached as to bring about price stability in the oil market. Now, this is where the matter gets interesting for the estimated 200 million people living across Nigeria. What happens if oil sells for $10 per barrel? Can Nigeria survive if the country’s projected output level consistently exceeds demands?
Here are a few things to bear in mind when seeking answers to these questions: Nigeria is currently in heavy debt in excess of N33 trillion. According to a 2019 report released by the African Development Bank, 50% of Nigeria’s revenue is spent on debt servicing. Can Nigeria even earn enough to service its debt if price and sales volumes continue to experience decline?
At the moment, there are more than 90, 000 employees in the federal civil service who draw N165 billion naira from the treasury every month according to Kemi Adeosun, the former finance minister. Can the country raise enough money to meet its salary obligations to the federal workers?
You may also recall that Nigeria runs a strange federal arrangement that permits states to come to Abuja every month to share proceeds of oil revenue. The money paid by Abuja is used in the states to keep the apparatus of government running, clear salary and pension arrears and maintain infrastructure. What happens when the federal government cannot even make enough money to pay its workers?
Presently, more than 21 million Nigerian youths according to figures from the Nigerian Bureau of Statistics are unemployed, an estimated 30 million others are underemployed. If those who are already employed by the government are unsure of salaries, what happens to those who do not have any jobs?
Under the current system, one person working in a family is primed to take care of the needs of his unemployed siblings and parents. What happens when the single person with a job is no longer sure of his salary at the end of the month? Do you see a looming crisis? One thing that is however certain is that unless something is done urgently to revert the inevitable; another 50 million people could be joining the existing 100 million already living in abject poverty in the country.
What happens next?
So what can Nigeria do to survive what looks like apocalypse?
In the first place, policymakers must be humble enough to admit that we are in serious crises. This is not the time for unprofitable propaganda, this is not the time to lie to the public neither is it the time to play politics or trade blames.
The concerned bureaucrats must put on their thinking caps and think outside the box with the intention of finding ways of how steering the country away from the path of doom. Right now, borrowing does not seem like a viable idea. The country is already facing a debt crisis and there is no point burdening future generations with the carelessness and lack of foresight of the present crop of leaders.
The first thing to do is to engage in aggressive cost-cutting measures. The cost of governance in the country is too high. It is about time the priorities of all arms of government are brought into question. Is it right to spend tens of billions acquiring new cars for legislators at federal and state levels? What international conferences can the president attend and which can he ignore? Is his presence needed at a conference on nuclear energy in say Bangladesh? Are there alternative needs that the funds that could have been spent flying the presidential jet and crew to the Far East for an event that has no direct bearing on national development be channelled into? How can funds be saved by cutting down the number of cars that our politicians put on the road each time they move from one place to the other? These are the low hanging fruits that we must start looking into at once.
Then the big one: corruption. The country loses so much money to this menace. Contract inflation, contract award to fictitious companies, awarding contracts that have no bearing on the needs of the public and all such gimmicks eat deeply into our national treasury. How can the country begin to stop all of these?
Now it is no longer a question of political posturing, cutting down on the level of public service corruption has become our only path to national survival. Can we muster the courage to do what is required? As they say, only time will tell.
