The current trend of the naira and shortfall in the government’s budget is not very surprising, given the fact that the oil market is the country’s major earner on the international front. It is said that at least 70% of government revenue depends on this sector. It is important that we understand what we are up against.
The collapse in global price of crude oil is a result of disruptive technology that makes it possible to have abundant oil at cheaper prices. For reasons best known to it, the OPEC has maintained it’s pre-crisis supply levels. Right now, the market is flooded with cheap and abundant fuel. Perhaps the thinking is that the shale revolution would shrink and choke out and crude oil prices would bounce back to an average of $100 per barrel. However, advanced countries have a lot of interest in seeing that fuel price stays low. Today, they finally have means to translate their interests into action. They are not only investing in cheaper and abundant fuel, they are also working hard at finding practical, cheaper and abundant supply of alternative energy.
The reason for this is around us. In recent times, we have witnessed unprecedented global economic growth and expansion. We have also experienced phenomenal economic shocks and recessions. Every state now considers, as high priority, ways to get back on the fast track of economic growth and development. The general strategy at play here is to find ways to cut back costs of production, increase supply of improved that are eco-friendly and offer them at profitable selling price. As such, even if the shale revolution would naturally choke out (that’s a big if), governments of advanced States would intervene to save the day.
The point here is that we can not wait for a time the price of crude oil would get back to $100 per barrel.
How are we holding up now? What would the coming months look like? Starting on January 4, 2016, IMF director Christine Lagarde commenced a four day visit to the country. She said, ‘we think that given the measures the government is taking, the country would not have a need for IMF loans.’ I do not think she was speaking accurate economic language. I think that she was talking to a significant proportion of the public who are suspicious of IMF loans and policy suggestions, and who are generally anti-IMF inclined. However, if we test her statement against the context on ground, we may see a different picture entirely.
The president recently presented the 2016 budget. It is a deficit as expected. Crude oil prices are not done with falling as we now have predictions it could sell as low as $20 per barrel soon. The naira has continued to dip against the dollar. Unemployment is rising. Inflation is inching up. Civil and public servants have been grumbling over delays in salaries. Government revenue is a shadow of what it used to be. There are loud economic and financial crimes investigations in hope of recouping misappropriated and stolen monies. Perhaps the biggest item in the midst of all this is that the federal government is taking off the fuel subsidy this year.
Two things are immediately clear. We are ‘scrounging’ for revenue. And second, we do need loans. That is the only way you can finance a budget deficit. Why did the IMF director say we might not be needing IMF loans? I would say she chose her words well. If we might not be needing loans, we might as well need them. A budget deficit in the face of falling revenues is a clear signal that we would need loans. Her comments also project the idea that the Nigerian economy still has space to bounce.
It is good for the government to come to terms with this early enough. Taking an early approach towards securing loans, while things still appear under control, has its advantages. We can negotiate from a position of strength and explore several debt financing options. The economy would yet be able to absorb the benign reforms that receiving loans may necessitate. Furthermore, the ease with which we receive such loans would boost investor confidence. If creditors feel safe to loan us money, then it is a sign that we are still a good place to invest in.
However, if we wait till things do appear bad before reaching out for loans, we would have less bargaining leverage and investors would become extra wary in doing business with us. One recent example of what happens when a state does not rise early enough to its economic realities is Greece. If Greece’ government had started pursuing smart reforms, debt restructuring, and attracting investment capital as early as 2008, it would not have had the trouble times it suffered in the last three years.
We must not take loans to merely keep the government afloat, i.e, having just enough to run its concurrent expenditures. We need to develop smart investment plans and policies for short and long periods of time. Many have seen the oil economy winding up and they immediately clamor for a reawakening of the agriculture sector. Investing in agriculture is good. But have we analyzed the maximum yield in profits we could have per million naira invested? I do not imagine that earnings from agriculture could bear the financial burden of this country for half a year. We must be careful to invest in right proportions, lest we launch another era of white elephant projects.
Let us look at our non-oil exports and our trading partners. Are there potential advantages that we are not exploring yet? Could we tweak our foreign trade laws, quotas, charges and taxes in such a way that it shores up the volume of our trade and earnings? How about our trading partners — are there profitable needs they have that we can attend to? What partnership agreements can we initiate with and through them to expand our market reach? How can we make it easier for legitimate foreign direct investment to flow into the country, and how can we channel that inflow to improve our citizens’ standards of living?
I hope the government has a team of thinkers in place who are dedicated to thinking, researching, collaborating and recommending smart policies, which the government would be eager and committed to implementing. Hopefully, with the right sort of thinking, collaboration, recommendations and executions, we would have a merrier story to tell in 2017.