SIGNIFICANCE OF CRUDE OIL PRICE CRASH ON POST COVID19 NIGERIAN ECONOMY
Why is oil price crashing?
According to www.statista.com, it must first be accepted that global crude oil exports has greatly increased in the last ten to twenty years from 12.28 million barrels per day in year 2000 to 13.34 million barrels per day in 2015. Demand on the other hand, has recently fallen due to nations switching to renewable energy and the emergence of electronic automobiles.
Worthy of note is the effect of the Corona Virus pandemic which has successfully slowed down and in most climes, halted major commercial activities that require energy use.
Finally, the oil price war between oil producing nations across the world including Saudi Arabia, Russia, Mexico and the US is also a major debilitating factor.
Key facts to note
- Initial oil benchmark in the 2020 budget was $57 which was later reviewed to $30. Bonny Light (Nigerian Crude) currently sells for about $20.
- COVID19 is still spreading and will most likely enter the coming month of May, 2020. The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) already told state governments to brace for zero allocation by June, 2020.
- Revenue from crude oil sales is dropping fast, Taxes are very likely to be evaded in the second quarter by business business that haven’t made any profit in the last four weeks.
- The Federal Inland Revenue Service (FIRS) under a new leadership claims to have made over one trillion in the first quarter of 2020 but currently pleading with selected thriving large companies (Telcos, ICT, Food and Daily needs) to file in their taxes if possible ahead of time.
The effects
1. National inflation which is about twelve points is being further stretched to increase as the exchange rate of the dollar to naira is already over 400 naira with respect to the silent devaluation of the naira by the Central Bank of Nigeria in a bid to make more money available for government.
2. Even with the best fiscal and monetary policies, the monthly shared allocations amongst the three tiers of government is bound to dwindle as long as the global demand for crude oil continues to dip while production increases.
3. Sequel to dwindling income, government (Federal and State) spending on projects will likely reduce too.
3. Data from Nigeria Bureau of Statics (NBS) shows that less than five states are actually capable of running successfully without monthly allocations from Abuja. This directly means that there is a huge possibility of state governments being unable to meet up with their monthly wages and salary payment obligations as was observed during the 2016 economic recession where some states owed their labour force up to ten months salaries.
According to the group general managing director of the NNPC, Dr Mele Kyari, the regime of subsidy has finally been ended. The import of this statement in essence could be defined to mean that henceforth the final pump price of petroleum products such as PMS (Petrol), DPK (Diesel), Jet-A1 (Aircraft fuel) etc will now be solely determined by the international pricing of crude oil. For example, if crude oil prices go up as we all desire at the moment, the pump price of PMS will automatically go up to as much as 300 naira! This could have been some good news if only we are currently producing all the fuel we use. Unfortunately, we don’t.
Possible solutions
While the palliative distributions by government across board must be appreciated, the following suggestions should also be ensured
1. Well crafted (fiscal and monetary) policies: Federal and state governments need to begin a series of structural adjustments while looking within to increase IGR where possible.
2. Clearly, this is not the time to employ hundreds aides or acquire exotic cars. All loop and crook holes must be plugged. Suffice to say also that money not spent must be saved.
3. Economic support in terms of stimulus packages for medium, Small and micro enterprises. These sector employs the largest labour nationwide and hence will require specific interventions targeted at them. This is not the time to demand payment of tax from such, I’d rather they are granted tax holidays and supported with calculated bailout funds so they can remain in business till the COVID19 pandemic ends.
4. Chaos is a ladder and every disruption is just about another opportunity to restrategise. This period offers government and wealthy citizens to look within and begin to invest on Local production of as many commodities that were hitherto imported into the country. We just might get it right and save billions of dollars that we lose annually to the countries where we export them.
5. Government should also consider partial lockdown with strict enforcement of the standard WHO/NCDC guidelines of Physical distancing, use of face mask, personal hygiene, washing or sanitising of hands at every opportunity and not total lock down as is currently being observed in 2 states and the FCT officially as well as no less than 5 other states as ordered by their executive governors. This suggestion is partly in line with the recent suggestion of our former CBN governor, Prof Charles Soludo. The economy needs to be allowed to run partially and take off in phases to allow for some momentum gathering ahead of when the pandemic will be done with.
Oladayo Ogunbowale is currently a News and Current affairs analyst with the Broadcasting Corporation of Oyo State (BCOS) where he co-hosts a daily breakfast newspaper review program (Conversation with Dayo and Tola, formerly News Bit). He is also a regular face as ‘in-house analyst’ on the State owned BCOS TV.