LCCI, NECA Recommend Policy Options to Cushion Effect of Oil Price Slump
With a 50.69 percent slump in oil price per barrel between December 2019 and March 2020, Lagos Chambers of Commerce and Industry (LCCI) and Nigeria Employers’ Consultative Association (NECA) have proposed equity financing and private infrastructure funding, among others, as strategies to prevent Nigeria from slipping into grave economic contraction.
Also, the two foremost business associations – LCCI and NECA – have warned the federal government against going ahead with its plan to take additional $22.7 billion borrowing, which they say, will bring the country’s total debt stock to $108 billion if the National Assembly approves the request for additional foreign loan. The Senate had already approved the loan.
In separate conversations with THISDAY, Director-General of LCCI, Dr. Muda Yusuf and his NECA counterpart, Dr. Timothy Olawale expressed concern about Nigeria’s economic future amid steady crash in the price of crude oil since December 2019, suggesting policy options to cushion its effects.
The price of Organisation of the Petroleum Exporting Countries (OPEC) basket of fourteen crudes had slipped to $33.25 a barrel on Thursday, compared with $35.54 the previous day, according to OPEC Secretariat calculations.
From $67.31 per barrel in December 2019, oil price had dropped to $63.83 in January 2020; $56.21 in February 2020 and $33.25 as at March 31 with Goldman Sachs’ prediction that the price would crash to about $30 per barrel.
With this trajectory, the gradual slump in global oil prices had upset Nigeria’s 2020 appropriation plan premised on a benchmark of $57 per barrel, thereby compelling the federal government to seek an urgent review of the benchmark and most likely the budget size among uncertain economic future.
Disturbed by this global dynamics, LCCI’s director-general warned that the sharp drop in revenue could cause significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers.
With the tumbling oil price, Yusuf added that a drastic reduction in the revenue of governments at all level “has become inevitable in the near time on the ground that oil revenue currently accounts for about 50 percent of government revenue and about 85 percent of foreign exchange earnings.”
He noted that the trend “will have grave implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. With this scenario, the outlook for oil dependent economies looks rather gloomy.”
To prevent Nigeria’s economy from slipping to recession, the director-general warned that additional $22.7 billion borrowing (if eventually approved) would bring the total debt stock to $108 billion, saying the capacity to service the current stock of debt raises serious sustainability concerns.
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 third quarter 2019, an increase of 108 percent. With additional $22.7 billion loan, it will bring the total debt stock to $108 billion. But state governments owe 15 percent of the debts.
“For instance, the debt service provision in the 2019 budget was a whooping N2 trillion; whereas the total capital budget was N2.9 trillion; this implies that the debt service commitment was 70 percent of capital budget allocation. Debt to revenue ratio was about 30 percent, which is also on the high side.”
He, therefore, urged the federal government to take appropriate policy choices to attract equity domestic and foreign private sector capital for infrastructure financing.
The director-general added that the federal government “should look beyond tax credit in its quest for complimentary 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.”
Also, Yusuf recommended that the federal government should deepen public private partnership (PPP) and public private dialogue should be deepened to harness quality ideas on how to manage this rather scary situation.
He equally counseled the federal government “to review the spending structure of government and the cost of governance. The ballooning recurrent expenditure, in the face of declining revenue is a cause for concern. It is also important not to respond to the situation in panic mode in order to avoid a disproportionate response which could do even more harm to the economy.”
Like his LCCI counterpart, Olawale lamented that the global oil price “has tumbled below the $57 on which the 2020 National Budget was premised. The scale of the reduction is eliciting unpleasant memories of 2014 and 2015 oil price downturn that largely pushed the country into recession in 2016.
“The fluctuation of the oil price is already threatening the National budget benchmark and overall revenue of the government for 2020, with consequential negative implication for the proposed capital projects and other critical expense heads.”