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Uncertainty Over Projections In 2019 Budget

There is an air of uncertainty surrounding the federal government’s budget plan for the year 2019, with pundits questioning the realities of the assumptions engaged in arriving at a proposed plan even in the face of change in global economic trends. FESTUS OKOROMADU chronicles experts’ views on the implications of dwindling oil prices on the financial plan.

The significant role crude plays in Nigerian economy, came to the fore again when the federal government presented the nation’s financial road map for 2019. The document commonly known as National Budget once again portrayed that the economy will continue to depend on the sale of oil and gas as the major source of revenue for the government while it remains the largest supplier of foreign exchange to the country.

However, experts have expressed concern over the proposal contained in the document, bearing in mind the volatility of the global oil market and recent developments and the probable implementation of such on the nation’s economy.

The argument in some quarters is that a significant drop in either the price of crude oil or production will directly have a negative impact of the fiscal position of the country. Economists are also of the opinion that if the fiscal position is affected negatively it will further cause major macroeconomic instability, particularly in the exchange rate and inflation rate.

Bearing in mind the sensitivity of the crude oil market, experts have therefore warned that the government should learn from the past and take proactive measures against unwarranted economic crisis.

International Perception

The price of crude oil is believed to be one of the key factors that will shape economic direction of the year 2019. Experts say the Organisation of Petroleum Exporting Countries (OPEC), and its relationship with non-OPEC members as well shale oil production in the U.S , will determine the stability of the market.

The International Energy Agency (IEA) in its outlook for 2019, projects a global oil demand of 1.4million barrels per day.

Although oil prices has continued to post gains last week with Brent now $58.50 per barrel, experts insist that there are indications of a global economic slowdown driven by an over supply of crude oil to the global market.

Budget Assumption

The federal government 2019 Budget proposal as it concerns the petroleum sector is anchored on key assumptions, like Oil price benchmark of $60 per barrel; Oil production estimate of 2.3 million barrels per day, including condensates.

The sector is therefore projected to generate N3.73 trillion out of a total revenue projection of N6.97 trillion forecast for the year.

Meanwhile in what appears to be owning up to how unrealistic the plan seems as against market realities, President Muhammadu Burahi in his budget speech stated, “Notwithstanding the recent softening in international oil prices, the considered view of most reputable analysts is that the downward trend in oil prices in recent months is not necessarily reflective of the outlook for 2019.

“However, as a responsible Administration, we will continue to monitor the situation and will respond to any changes in the international oil price outlook for 2019.”

Experts View

A lecturer of economics law at the Abuja University, Dr. Olanrewaju Aladeitan who spoke with LEADERSHIP stated the budget will have huge challenges considering the current market situations, describing the projections as ambitious.

“Given the current circumstances, the proposed oil price benchmark and production volume are quite ambitious, and this will make the budget not to perform.”

He pointed out that oil price is likely to fall further due to increasing production from the United States and some other non-OPEC members had been on the increase.

On his part, the Managing Director of Financial Derivatives Company Limited, Mr Bismarck Rewane, suggested that the government would need to review the oil price benchmark downwards.

Similarly, Nigeria’s first Professor of Capital Market, and Head, Banking and Finance Department, Nasarawa State University, Keffi, Uche Uwaleke says the $60 per barrel oil price benchmark is unrealistic.

“The stark reality today is that developments in the international oil market already suggest an outlook that is full of uncertainties regarding the crude oil price”, he said.

According to Prof. Uwaleke, the international crude oil market is well known for its volatility. He noted that the recent agreement by OPEC and its allies to cut production by 1.2 million barrels per day starting in January 2019, has done little to halt the decline in oil price.

“The present uncertainties surrounding the global economy could have adverse effects on crude oil price. In its latest World Economic Outlook, the IMF downgraded global economic growth to 3.7 per cent for 2018 and 2019, 0.2 per cent lower for both years than had been forecast earlier”, he said.

He pointed out that, the US-China frosty trade relations remain a key risk to global growth. Worse still, a lack of clarity about the recent U.S.-China trade truce, announced a few weeks ago by the Trump administration, is contributing to global uncertainties.

Without any doubt, global economic slowdown will have far-reaching implications for the demand for Nigeria’s crude oil given that the Euro zone and the US account for a significant proportion of the country’s crude oil exports”, he said.

On the supply side, he said, “there is equally the threat of oil glut in spite of the OPEC+ output cut agreement especially with the recent announcement by the US that it had become a net oil exporter.”

However, there are those who are optimistic that the situation can be redeemed, the Head of Research at Agusto & Co, Mr Jimi Ogbobine, expresses such confidence. Speaking in a telephone interview, he told our reporter that there was still a potential for oil prices to rise above the benchmark, considering the demand and supply dynamics of the oil market.

“I am not sure we should actually panic about the price risk,” he said.

Citing the start of production from Total’s Egina deepwater field, he said, “So, whatever we may lose in terms of prices, we may gain somewhat in terms of production volumes.” Meanwhile, others such as the Director-General, West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, are of the opinion that Nigeria needs to think out of the box and stop relying heavily on crude oil sales.

Speaking with journalists on the issue recently,  he said, “You cannot rely on a commodity whose price you don’t control. We should see oil revenue as a windfall, not to rely on it. It is not reliable at all because oil price fluctuates; so we are vulnerable to this negative oil shock, and people have been saying it for long that we need to get out of it.”

One cannot but agree with him that the country is over depending on the sales of oil to run its economy and as he highlighted, the unfortunate part is that once the oil price starts going up, we relax. We tend to forget that the market is very volatile.

Whatever your stand may be, the declining price of crude oil is of serious concern to countries like Nigeria which depends heavily on the commodity. The challenge is even much more when both estimate price and production volume are threatened by external factors beyond our control.

Improving The Downstream

Another aspect of the 2019 budget that is likely going to create more problems for the economy is the provision of petroleum products. Due to inefficiency in the operation of the downstream sector, the government, even in the face of the numerous challenges and threat to the economy has earmarked $1 billion for petroleum products subsidy for the year under review.

Stakeholders in oil and gas industry have however called on the government to carry a total deregulation of the downstream sector, stressing that doing so would unlock the huge private investment potentials and stimulate sustainable growth.

Advocates of this view suggest that the huge funds spent by government on subsidy annually could be used to develop other sectors of the economy.

Speaking in support of the view, the Director General, Lagos State Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf, described the biggest burden on the economy today as the petroleum subsidy regime.

According to him, the government should encourage private sector players to take over the downstream sector of the petroleum business.

“When this is done, most of the challenges we see as regards subsidy, refineries and others will be adequately addressed. The government should only play a regulatory and not an operational role.

“Government has no business refining petroleum products, retailing or distributing fuel as well as the marketing of these products. We cannot continue to carry that kind of burden in the oil sector,’’ he said .

The LCCI boss said failure to address the downstream sector is putting stress on government finances adding that payment of subsidies puts tremendous pressure on the foreign exchange market and foreign reserves, just as it exerts immense stress on the nation’s treasury.

“It remains a cause for concern that the subsidy regime had subsisted, especially at a time when the economy is facing unprecedented fiscal challenges.

“At a time when productivity in the economy is constrained by acute infrastructure deficit; at a time when public institutions are finding it hard to pay salaries. There cannot be a better example of resource misapplication.

“There are two components of this; the first is the genuine subsidy, which is the differential between the pump price and the landing and other costs of fuel.

“The second and more disturbing component is the transparency problems inherent in the fuel subsidy administration, including the petroleum equalisation policy. For several years, the economy suffered severe bleeding from this phenomenon.

Yusuf said total deregulation of the downstream would enhance free resources for investment in critical infrastructures such as power, roads, the rail systems, health sector, education sector etc.

“Full deregulation will create more jobs for the teeming youths of the country in the downstream oil sector as investment in the sector improves.

“It will permanently eliminate the fuel queues. The subsidy regime has done incalculable damage to the economy over the years.

“The citizens have in the past suffered untold hardships resulting from scarcity of petrol and in many instances buying the product far above the regulated price.

“The nation’s treasury and foreign exchange market has been under severe pressure from the funding of petroleum product importation. This should not continue if the Nigerian economy must make progress,” he said.

Speaking in similar direction, chairman Western Zone of the Independent Petroleum Marketers Association of Nigeria (IPMAN) Alhaji Debo Ahmed, urged government to liberalise and enforce total deregulation of the downstream sector to boost the country’s economic growth.

Ahmed said that deregulation remained the best option to move the economy forward, adding that full deregulation would bring in investments into the sector.

He charged the government to summon the courage to fully deregulate and remove subsidy totally to open the market for investors.

“If government likes, they can introduce gradual removal of subsidy but it should not go beyond 6 to 18 months period. If fully deregulated with rules, you will have the serious investors coming in to invest adequately,’’he said.

They however submitted that government needs to fast track the petroleum industry governance bill (PIGB) to facilitate the process.

The LCCI DG, said, “This is the spirit of the Petroleum Industry Bill (PIB) which, regrettably, has again got stuck in the legislative process.

“The reform of the oil and gas sector would create a number of advantages for the economy,” he said.

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