Vandalism, low oil price and 2016 budget fears

The destruction of oil installations by militants and the drop in global oil price have caused the federal government to lose revenue targets triggering fresh worries about the ability of the country to fully fund its 2016 budget.

Nigeria’s 2016 budget of N6.06 trillion is based on the assumption that the country would sell 2.2 million barrels of oil per day at $38/ barrel to generate a substantial part of the estimated revenue of N3.86 trillion to fund it.

The federal government in its plan to reduce over-reliance on oil earnings, projected oil revenue of N820bn in the 2016 budget down from N1.64tr in 2015.

Oil production has been drastically reduced to less than 1.5 (and in some instances to as low as 900,000 barrels) million barrels per day, a far cry from the peak figure of 2.2 million barrels, as a result of damage to oil and gas facilities by militant groups since February. The shortfall in oil production has eroded the benefits of slightly high oil prices attained at the first quarter of 2016.

Oil price fell to $40 per barrel recently, as the dollar strengthened off the back of a strong July jobs report in the United States. The fall, however, marked an improvement from a recent drop in the price to $36.68 a barrel which is below Nigeria’s oil benchmark of $38 per barrel, quoted for the 2016 budget.

Budget impact

Pipeline bombings, oil theft and low crude price have helped in no small measure in hurting the finances of the country, leading to a significant decline in revenues, a huge decline in the country’s foreign reserves and a free fall of the naira.

Latest data for revenue earnings obtained from the Central Bank of Nigeria (CBN) and the Federation Account Allocation Committee (FAAC) showed that the N599bn federally-collected revenue (gross) in June 2016 fell short of the provisional monthly budget estimate of N814.87bn, although it was higher than the N384.88bn collected in May 2016 due to improvement in tax collection and none oil receipts.

An analysis of revenue collection between the first five months of 2015 and 2016 showed that revenue earned from oil dropped by over N700bn from N1.764tr in 2015 to N1.03tr in 2016.

The implication, according Finance Minister Mrs Kemi Adeosun, is that, “Some Ministries, Departments and Agencies (MDAs) might find it impossible to implement projects appropriated in their budgets.”