July 16 2014, crude oil (Brent blend) traded at circa US$115 per barrel (pb) on the global spot markets. October 16 2014, it was trading at circa US85pb. In 3 months, our main export earner (and the largest contributor to official earnings) had lost a quarter of its price.
The official response to what ought ordinarily to qualify as a dread scenario has been excessively optimistic. We have been invited by the minister responsible for these matters to believe that “all is well”. At first blush, nothing could be truer. The Jonathan administration at the federal level has pursued a “Transformation Agenda” over the last five years, which according to its boosters has fundamentally changed the national economic ecosystem.
We have in this period (depending on whom you are in conversation with) eliminated dependence on the imports of major commodities, especially rice. We have seen changes to the power sector (especially the transfer of distribution assets to the private sector) that over time should see domestic power generation rise from the abysmal levels that it is at currently. Similar changes have either happened (or are about to take place) in the railway, roads, inland waterways, and automobile sectors.
Taken together, the transformation agenda should have improved the resilience of the domestic economy to external shocks such as the current one provided by falling oil prices. Indeed, whereas the Obasanjo administration simply built up fiscal buffers to protect against such vulnerabilities, the Jonathan administration went several steps further through the rapid depletion of these buffers in order to support the improvements it claims to have wrought in domestic capacity.
At a different level, the International Monetary Fund estimates that a 10% drop in global oil prices results in a 0.2% increase in global output over a 6 to 12 months period. Oil importing countries, facing lower oil import bills, spend the gains therefrom in a way in which oil-exporting countries always fail to spend the windfall from higher prices. Therefore, if we are to believe the exchequer, we confront a win-win situation. Reinforced to absorb the shocks from lower oil prices, Nigeria is just as poised to benefit from the uptick in global economic output from falling oil prices.
“Alice in Wonderland” stuff? Not entirely. I am not sure whether the relationship is causal or correlated, but in the immediate aftermath of the plunge in oil prices, a number of sub-national governments have been reported as no longer able to meet their payroll obligations, as disbursements from the federation accounts, the main source of provincial and municipal revenues in this country appear to have dropped markedly. Even the exchequer may have conveyed new instructions to banks designed to limit the latter’s exposure to public sector obligors.
Certainly, the Central Bank of Nigeria has limited foreign currency borrowings by banks in the country, as it seeks to put a lid on the risks inherent in the foreign exposures of banks who have lent to the power, oil, and high-end property sectors. Other transactions now, reportedly, require the approval of much more senior officers than previously.
What could be the matter?
Truth is no one knows. Moreover, these are not the only part of government’s activities that are shrouded in mystery. There are three break-even points, for instance, that have suddenly come to matter as oil prices have tanked. Given that oil is our major export earner, at what price does earnings from oil translate into a current account deficit? Given that crude oil exports also comprise nearly all of our public revenue, at what price does the federal budget become unsupportable? At what point, in other words, does the fiscal deficit begin to exceed the 3% target? Given the ruckus over reforms to the exploration and production of crude oil, at what price (whether at the joint venture cash level or with the production sharing contracts) do operations in the upstream sector become uneconomic?
Just about anybody you speak to has (often wildly differing) numbers for these three break-even points. Nonetheless, all agree that at US$85pb, the three indices would be in bear territory. Back-of-the-envelope arithmetic supports this, too. Over the period in which oil prices have remained elevated (that is, for the most part of this administration’s tenure), the balance on the external reserves have fallen as rapidly as has the balance on the excess crude account. In addition, although it has kept faith with the letter of the oil price fiscal rule, by indicating a budget benchmark considerably lower than prevailing spot market rates for crude oil, we have not seen this difference show up anywhere.
We must assume, therefore, that this difference has been spent. The bible recounts an earlier version of this dilemma. But, whereas the King of Egypt was lucky enough to find a counselor who saved away in the “years of plenty”, our liege may have been persuaded to spend it all. The narrative about how positive the economy’s short- to medium-term health is may thus be conjured out of pure ether, like the new clothes of another fabled emperor!
In contrast, however, we have the example of the South Africans whose response (last month) to the effect of the recent lengthy mining strikes on their economy’s outlook was to slash GDP growth estimates for this year from the 2.7% that they had put forward in February, to 1.4%.