Against the recent crash of crude oil price, EZREL TABIOWO examines the potency of the 2015 budget proposal towards rescuing the Nigerian economy from its many misfortunes
Before its refusal to continue patronage of Nigeria’s crude oil market, the U.S. remained the largest importer of the country’s crude oil, accounting for 40% of the country’s total oil exports. Nigeria provided about 10% of overall U.S. oil imports and ranked as the fifth-largest source for oil imports in the U.S.
Consequently, with Nigeria recording a 40 percent loss in crude oil export, same has led to a fast dwindling fortune for the country in terms of generated revenue, while also being responsible for the price fall of oil in the international market from about $80 per barrel of crude oil to about $56 per barrel.
Explaining the decision of the US to stop importation of oil from Nigeria, White House Director of the US National Economic Council, Mr. Jeff Zients, while addressing journalists last Thursday on the state of the America Economy alongside US Labour Secretary, Thomas Perez, and White House Policy Council Director, Cecelia Munoz, said the action was necessitated by the rise in oil production in the US.
He however failed to explain why only Nigeria was singled out of other major oil producing countries such as Saudi Arabia, which still export crude oil to the United States.
The development has led analysts to believe that the action by the United States government is a form of sanction on Nigeria, that is politically-motivated than being a mere economic decision consistent with President Barack Obama’s energy strategy as claimed by the white house.
Austerity measures of 2015 budget
Clearly sensing the imminent danger which looms on the Nigerian economy due to the country’s continued dependence on oil as its source of mainstay, Finance Minister and Coordinating Minister for the Economy, Dr. Ngozi Okonjo-Iweala, on December 17, 2014 shortly after presenting the 2015 budget separately to the Senate and House of Representatives, explained that one of the major focus of the budget proposal is the diversification of the Nigerian economy.
Iweala stated that the 2015 budget estimates were arrived at by the federal government based on the growth of the country’s Gross Domestic Product, GDP, which reflects the present realities of the economy.
Giving highlights into the proposed estimates of next year’s budget, Iweala said that the crude oil benchmark was pegged at $65, with production figure of 2.27 million barrels per day. According to her, the country’s GDP estimated at 5.5 figures for next year is expected to ensure growth in 2015, one which she described as an improvement from this year’s figure of 6.35.
She said: “We have submitted the 2015 budget, the highlights are, the benchmark price for oil of $65; Production figure of 2.27m bpd.
“We have estimated a GDP growth based on the circumstances of the country, which will be about 5.5 percent; this is down from the 6.35 percent we had earlier from the National Bureau of Statistics which is still one of the best growth rates in the World.
“The budget seeks to protect the average Nigerian because the key is that it focuses on the diversification of the economy and it has been working because food prices have not risen in spite of the depreciation of the naira.”
She added, “Inflation rate as estimated by the National Bureau of Statistics has fallen from 8.1 to 7.9 percent. This budget really focuses on moving us to diversify economy and raise non oil revenue.
“We have made up for the fall of $13 per barrel, from $17 to $65, by raising non oil revenue through various types of taxes and policies. The surcharge on luxury goods is there, plus additional tax efforts to close leakages in revenue.”
According to her, the fall in oil prices was not happening for the first time, since Nigeria had experienced it in the 1980s when prices fell to $8 per barrel and the economy fell into recession, with GDP contracting by at least 8 per cent in 1986 and 1987.
At that instance of same happening, Iweala said the Federal Government had to turn to international financial institutions for budget support.
The Finance Minister also recalled that Nigeria for a second time, experienced another price shock in 1998 when oil prices fell below $10 per barrel, and the economy was again gripped by stagnation with growth of 0.47 percent in 1999 according to World Bank data.
Dr Okonjo-Iweala said the present situation is very difficult, as Nigeria is losing as much as 3 per cent growth in GDP as a result of oil price volatility. She disclosed that as part of measures to cushion the predictable hardship due to the continued drop of oil price in the international market, the government would henceforth collect “tax on luxurious goods, stressing that this was part of measures aimed at increasing revenue from non-oil sectors.
“We all know the definition of luxury goods. We are still compiling the lists and one of the things we can tax is champagne, alcoholic beverages, jets, luxury cars, and we will look at the engine capacity, and yachts. We are putting the list together but we intend to do a surcharge going forward on these items. The principle is that those who are better off in the society (and I hope they won’t mind) should be willing to share a bit more in remitting a little bit more to the treasury than what they normally do on these things,” she said.
Apart from the taxation increase on luxury goods, the minister disclosed further that there would be a reduction in international travel within the public service.
More austerity measures were announced by the government during the presentation of the 2015 budget. As a short term measure, Okonjo-Iweala, while giving a breakdown of the budget, said a 10 per cent import surcharge would be imposed on new private jets.
Similarly, she explained that a 39 per cent import surcharge would be imposed on luxury yachts, which potentially would contribute N1.6 billion in 2015; while another five per cent import surcharge would be placed on luxury cars, which is estimated to yield about N2.6 billion in additional revenue.
While the projected GDP growth rate stood at 5.5 per cent, the government put the exchange rate at N165 to the US dollar.
The non-oil revenue (including non-Federation Account) is projected at N1,684.63 billion with a Fiscal Deficit of N755 billion (or 0.79 per cent Domestic Borrowing of N570 billion down from N571.9 of GDP); and billion in 2015.
Counting Nigeria’s losses
But despite the series of assurances from the Finance Minister to Nigerians, unfolding events lately seem to once again invalidate the efficacy of the 2015 budget proposal before the National Assembly, particularly in view of the recent further drop in crude oil price.
Recall that the federal government last year had twice made a review to the oil benchmark in the Medium Term Expenditure and Fiscal Strategy Policy document that forms the basis for the 2015 budget proposal.
The review had seen the oil benchmark being revised from $78 to $73, and subsequently $65 owing to the sporadically falling prices of crude oil in the international market.
With the latest drop of international market price to $56 per barrel, the feasibility of the 2015 budget oil benchmark is once again threatened, in view of the $9 per barrel difference which contrasts and creates a gap that the proposed austerity measures by the federal government in the budget may after all not address.
Even disturbing is that the 2015 budget proposal showed that the federal government had slashed capital expenditure by about 43 per cent to N634bn, compared to about N1.1tn spent in 2014.
The outcome of the downward slash is expected to significantly affect government’s ability to executive major capital projects this year.
According to the document, the share of capital vote to total expenditure has also reduced to 14.6 per cent, up from 23.8 per cent recorded in the 2014 fiscal year.
Also, major oil companies in the country such as Chevron, it was recently learnt, have respectively commenced moves at ensuring a 25 percent downward review on expenditure in this year’s budget.
The impact, it is believed, may lead to a cut on recurrent expenses, one that in turn may unfold in job losses.
Similarly, Ghana is planning to significantly reduce the quantity of gas it purchases from Nigeria in the next couple of months through increased local gas production. The disclosure was made by the President of Ghana, Mr. John Mahama, at the Global African Investment Summit in London.
Speaking at the summit, Mahama said: “We had a lot of excitement when the gas pipeline was built hoping that the abundance of Nigerian gas will flow through the pipeline to help all the four countries signed onto the pipeline, but the volume has been very disappointing.”
He, however, expressed the hope that the country’s current energy crisis will stabilise when works on the Atuabo gas processing plant is completed, adding that the plant should start producing gas for power generation by the end of November, 2014.
According to Ghana’s President, the country is working hard to court more private investors to shore up local production of gas to solve the country’s power crisis after Nigeria stopped supplying gas to Ghana over a strike action by oil workers, and which led to the shutting down of three plants.
The overall development as manifested in the number of economic crises plaguing Nigeria, has led analysts to believe that the country may this year be forced yet again into another round of borrowing, if it must escape the present economic misfortune it has been plunged into due to the crash in crude oil price.
It behoves therefore on the National Assembly, through its committee on Appropriation in the Senate and House of Representatives, to ensure that the oil benchmark and other parameters in the 2015 budget proposal is reviewed favourably to meet with Nigeria’s present economic realities.
The apex legislative body, while expediting action on consideration and passage of the budget, must also at this instance live up to its billing as the country’s bastion of democracy, by protecting the interest of Nigerians, as against tilting towards the perceived reputation of the institution being “a rubber stamp of the executive”.
