Notes on the coming Economic crunch -By Waziri Adio

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Notes on the coming Economic crunch -By  Waziri Adio

 

Despite the spirited attempts by some officials to put a calm face on things, something is coming at us, and it is not pretty. It is a major economic crisis, fuelled by the slump in the price of crude oil. The coming crisis may be short or it may be long. But come, it will. So we need to brace up for the uncertainties of the lean time, a period that will be made even more unpleasant by the fact that we have left ourselves very little wriggle room. We need competent and clear-headed management of the economic crisis to ensure that it does not complicate existing crises on the social and security fronts.

The omens have been in plain sight for a while now, with dwindling oil revenues at a time of sustained high oil prices, with persistent wrangling over allocations at the Federation Accounts Allocation Committee (FAAC), with the consistent depletion of the Excess Crude Account (ECA), and with the rationed release of the budgets of Ministries, Department and Agencies (MDAs). Those who had dared to skew their eyebrows had statistics on growth and inflation rates, the recalculated size of the economy, and the external reserves shoved on their faces as proof positive of the sound health of our economy.

While those indicators might still hold true in the interim, the more than 30 per cent slump in the price of crude oil, the product which accounts for more than 70 per cent of Nigeria’s revenues, means a crisis can no longer be denied, wished away, or resolved through clever or combative rhetoric. Two developments within the week put the arrival of crunch-time beyond argument. Last Tuesday, the Central Bank of Nigeria (CBN) devalued the naira from the official rate of N155/$1 to N168/$1, a move reportedly intended to stabilise the naira, take the wind out of speculative attacks on our currency, and preserve our external reserves. In addition, the CBN took other monetary decisions that will, in sum, reduce money in circulation and raise the cost of credit.

On Thursday, the Organisation of Petroleum Exporting Countries (OPEC), the oil cartel which accounts for 40 per cent of global oil production, opted to maintain its output at 30 million barrels per day. This was despite intense lobby, by its vulnerable members and non-members like Russia and Mexico, for a supply cut as a way to shore up plunging prices. OPEC’s current strategy is to allow oil prices to continue to slide to a level that will make it unprofitable for continued shale-oil production, one of the major drivers of supply glut in oil market. This strategy may work, and it may not. In the interim, our vulnerability as a country deepens as we are simultaneously confronted by falling oil prices, dwindling production, loss of the United States as a major buyer of our oil, and the shallow cover of our savings.

Immediately after OPEC’s meeting on Thursday, oil price tumbled to $74.36, a four-year low. The free-fall continued on Friday, when oil further crashed to $71.12 per barrel. This is already below our revised benchmark price of $73. Coordinating Minister for the Economy and the Minister of Finance, Dr. Ngozi Okonjo-Iweala, has said the country has a scenario-based plan that accommodates even a fall to $60 a barrel. She has also hinted at austerity measures and a ‘comprehensive’ plan to expand our revenue base and tighten spending while protecting the ‘common man’. While we wait for how all these will play out and hope for a quick rebound, below are some of my initial thoughts on this coming crisis.

Wages of Living Foolishly
It is elementary knowledge that commodity prices are prone to a boom-and-bust cycle. We have experienced a boom cycle for close to 15 years now that we have got used to it. Very few now remember that oil was selling for less than $20 in 1999 or that it sold for less than $10 at a point in 1998. From 2000, however, oil prices have soared, propelled largely by increased demand from China and constrained supplies, at different times and for different reasons, in Iraq, Iran, and Libya. Without any corresponding increase in cost of production, price of oil per barrel jumped to $60 in August 2005 and maintained this sustained rise, peaking at $147 in July 2008. We had some reality check in December 2008 when, on the back of the recent global recession, the price of oil tumbled to $40. But our country weathered that storm because we had sturdy external reserves then. Besides, the slump did not last, as oil price rose to more than $70 by August 2009. And until the recent slide, oil had consistently sold above $100 since February 2011. Ordinarily, we should be at a place almost at par with where we were in 2008/2009 when we successfully absorbed the shock from the global recession. But we are not. The period of consistently high oil prices also coincided with consistently unchecked oil theft, estimated at a cost of $5 billion per annum. So while oil sold at more than $20 above our budget benchmark price, we didn’t gain corresponding increase in revenues. The ECA took the hit.

Beyond the need to save for the raining day, we could have used the oil windfall of the past 15 years to deepen our economy through diversification and backward integration, infrastructure development, and investment in the welfare and the productive capacities of our people. All that we didn’t do. Rather, we went on a binge, getting high on oil money, living foolishly as if the party would last forever. But no party does. There is nothing that says oil price will not take a real tumble to half of its present level or even much lower. Remember 1998/1999. Okonjo-Iweala has hinted at investment in infrastructure and diversification of the economy as part of measures to tie us over this hump. This is sensible. But Noah did not start building his Ark on the day of the flood.

Privatised Gains, Shared Pains
Remarkably, our economy has grown at an average of 7 per cent for the past decade. But the growth has not been widely felt and has existed cheek-by-jowl with growing incidence of poverty, inequality and unemployment. Unlike the GDP growth, the coming crisis will not only worsen our human development indicators, it will also be widely felt. The prosperity was not shared, but the coming pains will be.

To start with, all tiers of government, including the federal government, will be seriously impacted by a dip in revenues. The IMF and the Deutsche Bank have estimated that we need oil to be at $123 per barrel for us to balance our budget. That won’t happen anytime soon and the $4.1 billion savings we have in the ECA cannot take us far into the bust zone. Sub-national governments will take more of the hit, as most are not financially viable outside of takings from the Federation Account. Lagos is the only state with a robust internally generated revenue (IGR) base. According to the National Bureau of Statistics (NBS), the IGR of Lagos in 2013 was N384.25 billion. That was 77 per cent of its 2013 budget of N499.1 billion. Lagos is the opposite of most states, with the bulk of them more than 80 per cent dependent on oil money (sample: Akwa Ibom 96.75%; Zamfara 97.6%). A drop of 20 per cent in oil revenues will definitely constrain the capacity of all governments to meet their obligations.

And given that our lives still revolve around government, the pinch will be felt across the board. CBN’s monetary interventions will also impact prices, disposable incomes, jobs and poverty level. The vulnerable will bear a disproportionate part of the crunch-time burden because they have little buffers. Okonjo-Iweala has promised taxes on luxury goods, investments in infrastructure that will create jobs and a conditional cash-transfer programme for the poor. We need to see and debate the ‘comprehensive plan,’ not to be fed drips and drops. We also need to properly dimension the impact of the imminent meltdown on the poor and fashion appropriate interventions, not only because it would be immoral to pile most of the burden on those who missed out of the boom time, but also because of the possible implications for social, political and security upheavals.

Not the Time for TINA
Like individuals, countries have three options when they experience income shortfalls: tighten their belts, borrow, and draw on past savings. Depending on their overall financial health and the cause and length of the crunch, countries may pursue just one option or a combination of the options. There is no option without costs and trade-offs.

It is therefore very important for government to avoid the dogmatism of insisting ‘There Is No Alternative (TINA)’ to its preferred course of action. There are always alternatives. If there are no alternatives, all economists will be ‘one-handed’ and will belong to only one school of thought. They do not. Managers of the economy need to shun the arrogance of thinking their way is the only and the right way. If they had all the answers, we wouldn’t be in this mess in the first place.

Also, being defensive or engaging in blame-game is of limited utility. If the states and the parliament could be blamed for depletion of ECA and for imposing unrealistic benchmarks, the blame for oil theft and non-diversification of the economy lies elsewhere. This is the time to acknowledge that there is distributed expertise and perspectives out there on how to solve a common problem and to take advantage of them. Now is also the time to begin preparation for future shocks. We should start tackling the structural weaknesses of our economy as well as cutting wastes, the cost of government and graft. We should not waste this crisis.

 

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