Against the backdrop of a long and steady decline in the international oil price, the Federal Government may have started reviewing developments in the global oil market with the intention of adopting a new oil price benchmark for its 2019 budget.
This came as the decline appeared to have bottomed out, yesterday. The N8.6 trillion budget was based on $60 per barrel (p/b) benchmark at a time international oil price was around $75p/b. Though the price later escalated to about $86p/b, it began a downward trend about seven weeks ago closing at a year low of $59p/b last weekend.
It, however, increased marginally to $61 as at Monday, which is still a threat to the 2019 budget, especially as a gap of at least $10 is required between the budget benchmark and prevailing oil price.
Consequently, in an email to Vanguard on Sunday, Director-General of the Budget Office, Mr. Ben Akabueze, stated: “$60 oil price benchmark for 2019 was based on our review of projections from multiple sources by knowledgeable organisations on the subject of oil pricing. It was deemed quite conservative four months ago when we settled for $60.
“We are willing to review the price projection downwards if it becomes clear that it is no longer sustainable. An alternative benchmark will be determined, following same process explained above.”
But Vanguard oil price monitor indicated a significant positive shift in the oil price trend as the commodity traded above $60/pb, yesterday. However, explaining further on challenges of Nigeria’s oil economy, Akabueze said: “Current oil production in Nigeria is about 2.1 million barrel per day, mbpd, still below the budget projection of 2.3 mbpd.
‘’OPEC production numbers do not include condensates whereas the number stated in the budget and NNPC’s reports include condensates. Nigeria has capacity to produce up to 450,000 bpd equivalent of condensates. “Continuing diversification of the economy, domestication of raw/intermediate materials sourcing for manufacturing, formalization of the non-oil sector, as well as stronger focus on tax administration/legislation will ultimately break the dependence on oil for government revenues.”
Commenting on the development, Director General, Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, said: “Data from the Organisation of Petroleum Exporting Countries, OPEC, shows that oil prices are trending down at $59.96p/b on November 29 from $88p/b one month ago.
“This is below 2019-2021 Medium-Term Expenditure Framework (MTEF) benchmark of $60p/b. The declining global oil price poses a major risk to Federal Government’s economic projections for 2019 fiscal year as well as impact adversely on its MTEF, if the trend continues.
“Analysts have described the slump in oil prices as the equivalent of a tax hike and tax cut in oil exporting and importing economics respectively. According to estimates by Capital Economics analysts, every $10-per-barrel fall in oil prices boosts incomes by about 0.5 to 0.7% of gross domestic product in major emerging market oil importers.
“The same discount will cause a 3-5% decline of GDP in most of the Gulf economies, and a slowdown of 1.5-2% of GDP in Russia and Nigeria on an annualized basis. This is not good news for Nigerian economy which remains fragile with GDP growth of less than 2%.”
On the impact of the development, Yusuf said: “The domestic forex market is already responding to recent sharp fall in oil prices. For instance, the local currency has dropped to N370/$ in the parallel market from N363/$ it traded for a better part of 2018.
There are fears that the sharp fall in oil prices, if sustained, could lead to a shortage of the US$ as follows. “As capital flow reversals intensify, as oil price weakens, and as foreign reserves come under pressure, there are worries that the capacity of the Central Bank of Nigeria, CBN, to sustain the current levels of intervention in the foreign exchange market will be tested. Reserves currently stand at $42 billion, down from $48 billion five months ago. “The improvement in liquidity and relative stability in forex market witnessed by businesses in 2018 will come under threats due to declining receipts from oil. ‘’This will have profound impact on the prices of imported goods and services leading to likely increase in the rate of inflation. “The fiscal operations of government would be adversely affected. This may further threaten the ongoing discussion around new minimum wage. “Despite sustained efforts by government to improve the business environment, Foreign Direct Investment inflows remain stagnated. ’The capital account faces significant uncertainty, as external portfolio investors exercise further caution due to developments in the global financial markets and the forthcoming general elections in 2019.’’
Yusuf called for urgent economic reforms, saying “given the challenging
economic conditions, key policy reforms would be imperative to support and
sustain the stability of the macroeconomic environment.