With the sustained slide in crude oil prices due to glut of oil on international market, experts have warned that Nigeria must prepare for a less than $20 oil price scenario.
The warnings are coming on the heels of the new projection contained in the “IMF Executive Board Concludes 2015 Article IV Consultation with Iran” report released last week, which predicted that the price of crude oil could drop between $5 and $15 in 2016 owing to the prospective lifting of economic sanctions on Iran and the capacity of the Middle East oil producing country to roll out one million barrels of crude daily.
Prices of Organisation of Petroleum Exporting Countries (OPEC) benchmark crude oil have fallen about 50 percent since the organization declined to cut production at a 2014 meeting in Vienna from a price as high as $110 to slightly lower than $38 at the weekend.
However, analysts who described the IMF projection as the worst case scenario, said the fact that Nigeria had benchmarked its crude oil price at $38 per barrel in 2016 budget had put the country in a tight corner.
They added that the President Muhammadu Buhari administration must be prepared for a scenario that could see oil sell for less than $20.
Director General, Lagos Chamber of Commerce and Industry, Mr Muda Yusuf, explained that “If price of oil goes as low as $20 per barrel in the global oil market as predicted, then the impact on the Nigerian economy will be very challenging considering that the budget proposal for next year has benchmarked oil price at $38 per barrel. Current trend analysis require that government do some adjustments.
“Government may be tempted to borrow more, but borrowing is not a sustainable option; we already have a record high deficit at 2.2 trillion while debt servicing is taking as much as N1.3 trillion which is about 35 percent of revenue. Deficit is bound to go up with more borrowing. We are almost at our limit already.
“A more sustainable option is for government to come up with economic policies that will attract private funding in various sector. Quality of economic policy is very critical at this time to attract private investments so that private investors can take up funding of key projects in various sectors, especially in the infrastructure sector,” he said.
Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane, in an interview told THISDAY yesterday that at $20 per barrel, it means Nigeria will no longer have margin on oil export, explaining however that there are other options available to the Federal Government to stay afloat.
He said that at $20 per barrel, many oil producing nations would go out of business, adding however, that last week pronouncement of the Federal Government to scrap fuel subsidy regime came at a right time.
He said government would have to tighten its belts further. According to Rewane, Nigeria is currently in an underwater situation, saying there is no cause for alarm as long as the country doesn’t stay in the same position for long.
According to a director with BGL PLC, Mr. Olufemi Ademola, “There are a few options available to the government but each with some not too pleasant consequences. The government could borrow to cover the gap from the potential oil revenue loss.
This would increase the fiscal deficit to above 2.16 per cent of GDP and the debt profile to more than 14 per cent of GDP. Although we have capacity for additional borrowing, it could have macroeconomic implication if the debt profile increases sharply just in one year. Should the government choose this option, it must be ready to deal with the consequent rise in inflation and exchange rate volatility.”
Explaining further, Ademola said another option is to aggressively pursue non-oil revenue drive such as taxes, levies and duties. While this would seem like an attractive alternative, it also has the tendency of being se