Oil price drop, high debt-serving costs: Another recession looms

In mid 2014, when the price of crude dropped to less than $30 per barrels globally, Nigeria’s revenue dipped by 70 per cent as oil was its main revenue source. With coronavirus pandemic and the Saudi-Russia trade war, analysts fear that Nigeria might just be on the precipice of another recession; BENJAMIN UNUTEME reports.

When in June 2014, global price of crude oil dropped from a $114 per barrel high to less than $30 per barrel, it became apparent to every informed Nigerian that the country was in deep troubles. 

And by 2015, when the Muhammadu Buhari-led All Progressive Congress (APC) assumed office, it had become clearer that it was just a matter of time before the country’s worst fear would be confirmed. It, indeed, came to pass in 2016, as after the country’s gross domestic growth (GDP) experienced four consecutive negative growths, the economy went into recession. 

However, the country was able to quickly recover in 2017 following some measures fiscal the authorities took and the uptick in the price of oil. Three years after Nigeria exited the recession woods, it is once again steering at recession in the face. 

Why so soon?

In 2017, the Minister of Kemi Adeosun, had told newsmen that Nigeria would spend its way out of recession, and the federal government did go about meeting its objective by raising capital expenditure (CAPEX) in the budget as well as resort to borrowing to fill the budget deficit in subsequent budgets. 

‘…Time for Buhari to take tough decisions on governance cost’ 

Experts, analysts’ take 

Meanwhile, analysts have continued to question government’s rationale in borrowing massively to fund its budget. According to them, rather than borrow to fund the budget, government should bring in private capital to drive the process of bridging the country’s infrastructure gap. There have been several warnings from both within and outside Nigeria that the country’s debt was growing at a disproportional rate to its income.

Even the minister of finance, budget and national planning had severally in the past admitted that “Nigeria’s challenge is more of revenue than debts.”

Though the country’s fiscal authorities have always come out to defend its borrowing patterns, it is obvious that the mood swing in the oil market may just about give credence to the various warnings.

The financial consultant, Quest Advisory Services, Bayo Rotimi, said there is no way the government alone can fund its infrastructure expenditure. 

“There is no way the government alone can fund infrastructure; it can never be funded entirely from the government’s balance sheet especially when you have a balance sheet or a revenue profile that is as volatile as it is. Between January and now you have seen what has happened to oil prices. Suddenly, our budget has been made nonsense of and the government might just have to quickly sit-down and recalibrate that budget, reduce the benchmark, reduce the revenue expectation,” he said.

The budget

A cursory look at the budget figures indicates that Nigeria anticipates generating revenue of N8.42 trillion while targeting to spend N10.594 trillion in expenditure.  

It hopes to generate 47.2 per cent of its revenue from other revenue sources, 31.4 per cent from oil revenue, and 21.5 per cent from non-oil revenue. 42.4 per cent of the budget will be expended on recurrent expenditure. 23.4 per cent will go into capital expenditure, while over 23 per cent of the budget will be used to service the nation’s debts. A budget deficit of N2.175 trillion is anticipated in the 2020 budget. 

To fund the deficit, the federal government plans to raise N252 billion from privatisation proceeds, N744.99 billion from new domestic borrowing, N850 billion from new foreign borrowing, and N328 billion from draw-down on multilateral/bilateral loan agreements. Technically, only 11.57 per cent from privatisation proceeds will be sourced without incurring additional debts on the country with a considerable debt profile.  

The debt challenge

The World Bank Group and the International Monetary Fund (IMF) had warned the federal government over its excessive borrowing.  The African Development Bank (AfDB) had also warned that Nigeria remained at moderate risk of debt distress.  With the debts presently standing at about $85.39 billion, Nigeria is walking a tight rope as it is determined to continue to borrow for capital projects execution.  

Meanwhile, the country’s debt profile continues to generate concerns despite assurances by fiscal authorities to the contrary. Available data have shown that a total of N3.49 trillion in domestic debt servicing payment was made by the federal government between January 2015 and September 2017. 

In the same period, the country paid a total of $1.07 billion (about N326.69 billion) to service foreign loans obtained by both the federal and state governments.

In 2018, N2.2 trillion was spent on debt servicing while N2.3 trillion has already been allocated for the same in 2019.  And according to figures from the budget office of the federation, the sum of N2.45 trillion representing 23.2 trillion has been allocated to debt servicing. The 14.5% is higher than the 2019 sum. 

A check on the budget document by our reporter revealed an overall budget deficit of N2.175 trillion for 2020, which will also be financed by borrowing. 

According to the approved 2020 budget seen by Blueprint Weekend on the BOF website, the government will borrow from domestic sources the sum of N744.99 billion while foreign sources will account for N850 billion and multi-lateral/bi-lateral loan drawdown will account for N328.13 billion.


All these have continued to worry analysts who believe that the rate of borrowing by the government should be of concern to Nigerians. According to the director- general, LCCI, Dr. Muda Yusuf, the latest loan had brought the total debt stock to $108 billion, even though 15 per cent of the debts are owed by the state governments.

He said, “The growing national debt is a cause for concern as the debt profile grew from N12.6 trillion in 2015 to N26.2 trillion in the third quarter, 2019, an increase of 108 per cent. An additional $22.7 billion borrowing would bring the total debt stock to $108 billion, although 15 per cent of the debts are owed by the state governments.”

He said the capacity to service the current stock of debts has raised serious sustainability concerns.

“The debt-service provision in the 2019 budget was a whooping N2tn, whereas the total capital budget was N2.9tn. This implies that the debt-service commitment was 70 per cent of the capital budget allocation.

“Debt to revenue ratio was about 30 per cent, which is also on the high side. In the 2020 budget, the total revenue could barely cover debt service commitment and recurrent spending. The opportunity cost of high debt service commitment for the economy and citizens is very high.”

Yusuf called on the government to evolve appropriate policy choices to attract equity from domestic and foreign private sector capital for infrastructure financing.

“The government needs to look beyond tax credit in its quest for complementary funding sources for infrastructure. We should be looking more in the direction of equity financing. But for this to happen, the policy and regulatory environment must be right.”

Addressing basic issues

Rotimi opines that for Nigeria to escape the recession trap there is need to deal with structural and fundamental issues that impede economic growth. 

“We have a situation where we hope to in the 2020 budget spend in excess of N5 trillion on recurrent expenditure, maybe this is the opportunity to dust-up the Oronsaye Report, this is the time to streamline departments and agencies that are duplicated. The cost of running government is way too high. So, now that our revenue has taken this type of a hit let’s address the expenditure and then seek private sector participation to support government in the delivery of infrastructure.” 

According to financial analyst, Godknows Chukwu, the nation’s economy has been depressed for a long time. Yes, an economy that has remained incapable of meeting the fundamental economic goals of; full employment; balance of trade and balance of payment advantage; quantum growth to catch local expectations due to predominance of primitive processes; weak infrastructure, especially energy and transportation; of course, we have never cured the malaise.

“Unfair distribution of wealth, with politicians making mess of the economy that they claim they are managing, destroying the naira. Today, we are just calling it recession, it is in depression mode. Developed economies do, and can enter recession and exit, but with clear evidence. Since the government announced exit from recession have we all been employed? The answer is no.”

For Joe Abah, public affairs analyst, “with oil prices plummeting and public debts soaring, now is the time for the Economic Advisory Council to earn its stripes. Now is the time for President Buhari to listen and take tough decisions on cost of governance. Now is the time for EAC members to walk away if he doesn’t.

The coronavirus impact

As it stands, China is the world’s largest importer of crude oil as well as the world’s second largest oil consumer according to the data from General Administration of Customs. China imported approximately 10.12 million barrels of crude oil per day in 2019 (about 12% of world’s daily crude oil production). This is so because the country is a manufacturer of goods and as such, needs oil to power up its production process. Airplanes also need crude oil to function. As such, activities in the China region drive up activities in the crude oil market. The country also accounts for 16 per cent of world’s GDP. For Nigeria, China is its largest trading partner. 

According to data obtained from the NBS, China accounted for 31.34 per cent of Nigeria’s total imports in Q3 2019.

With the emergence of coronavirus, production activities slow down as producers take caution in producing in a volatile environment (caused by the virus). With that, the demand for crude oil to power production process decreases. Furthermore, flights to and fro China has reduced and about 52 countries have imposed China travel restrictions, notably among which are the United States, Russia, South Korea, and Japan. All these tend to have an effect on the demand for crude oil.

As a result of the low demand for crude oil relative to supply, the price tends to drop and once this is so, the fiscal operations of the federal government will be in jeopardy because its revenue will fall below target.

Treading familiar path

However, Prof. Uche Uwaleke of the Nasarawa State University, Keffi, stated that over-reliance on oil has become Nigeria’s Achilles heels. According to him, government’s inability to diversify the economy has continued to pile more pressure on the country as long as there is oil market volatility.  

For him, seeking new ways to diversify the economy will help the country tackle shocks that might arise from the oil market. He advises that government should scale down hugely overheads and also seek ways to finance some of its infrastructure projects through private sector investments through Public Private Partnerships (PPP).

Speaking at the Channels Television programme, Sunrise Daily, monitored in Abuja, oil and gas consultant, Ronke Onadeko, said except drastic measures were taken, especially with Nigeria borrowing heavily, and revenue dwindling, it would be difficult to avoid stop the country going into recession. 

“Any country that is producing crude oil above $30 is already in trouble. So, now that prices have dropped and we have the additional responsibility of security issues, leakages, pipeline vandalism, militancy which makes it even more expensive to get crude out of the ground than other alternatives. 

“Policies are not consistent, fiscal terms are not appealing to investors. We just have our deficit in almost every index in the oil value chain. Now that the prices are extremely low, this is the time to liberalise the oil and gas sector.”

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