Of rising crude oil prices and IMF warning to Nigeria

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Crude oil stolen from drums

The International Monetary Fund’s recent warning that rising crude oil prices could jeopardize Nigeria’s 2022 budget illustrates the paradox of a country suffering in abundance, reports Festus Akanbi

The rise in crude oil prices hit the roofs last week when, for the first time in several months, the price of Brent crude hit the $123.7 per barrel mark, while West Texas Intermediate (WTI ) hit $119 a barrel. The rise comes amid continued concerns over supplies from Russia to propel crude to its highest level in two months.

Under normal circumstances, soaring commodity prices should translate into prosperity for citizens as higher commodity prices would naturally translate into more foreign exchange earnings.

However, in Nigeria, the reality is that whatever happens in the international oil market will trigger a chain of economic challenges that usually turn rising oil prices into more pains and hardships for the citizens.

In Nigeria, a combination of the sheer incompetence of the country’s oil resource managers, outright sabotage and a lack of political will has exposed Nigeria to volatility in the global oil market.

Already, the current rise in the price of crude oil has triggered an increase in the price of automotive gas oil (AGO), otherwise known as diesel in Nigeria, with the average cost of the product selling for 780 naira per liter at some petrol stations. and as high as N790 per liter in some of them.

The high cost of the product is further exacerbated by the ongoing war between Russia and Ukraine, which has led to serious supply chain issues.

Oil market analysts have expressed concern that crude oil prices could reach $125 on the dollar before the middle of the month given the trend of daily increases seen throughout the past week.

At the mercy of oil vandals

Unfortunately, while other oil-producing countries are counting on gains from rising oil prices, Nigeria remains at the mercy of oil thieves who steal almost 30% of the total oil produced in the country.

This was revealed by the Chief Executive Officer of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Mr. Gbenga Komolafe, who said that Nigeria had lost around 434 billion naira (around $1 billion) from the oil theft. between January and March of this year.

The huge amount lost due to the theft of oil was revealed the same day. The Minister of State for Petroleum Resources, Mr. Timipre Sylva, said International Oil Companies (IOCs) were leaving Nigeria because the environment was becoming too unstable for their operations.

Komolafe was speaking at the Iwereland Petroleum Communities Summit on the Implementation of Host Community Development Trust in Itsekiri Petroleum Producing Communities under the Petroleum Industry Act (PIA) 2021 organized by the Olu of Warri, Ogiame Atuwatse III.

The upstream regulator revealed that only about 1.35 million barrels, or 71% of the 1.9 million barrels produced by Nigeria, all other things being equal, reach the crude oil export terminals due to mass theft and vandalism in pipelines.

Pointing out that the challenge was preventing Nigeria from reaching its crude oil production capacity, Komolafe said that out of approximately 141 million barrels of crude oil the country produced during the period, around nine million barrels were lost. due to crude oil theft.

Oil subsidy

Perhaps the biggest threat to the country’s 2022 budget is the issue of oil subsidies, which the International Monetary Fund (IMF) says can only worsen Nigeria’s financial situation this year. He warned that with Nigeria’s fuel subsidy payments averaging N500 billion a month, total subsidy spending could reach a record N6 trillion by the end of the year.

The multilateral lender also revealed that a macro-fiscal stress test it carried out on the country showed that interest payments on debts in the country could be equivalent to Nigeria using 100% of its revenue. to pay off its debts by 2026 if not closely watched.

The IMF Resident Representative for Nigeria, Mr. Ari Aisen, made the revelations during the presentation of the latest regional economic outlook for sub-Saharan Africa in Abuja.

He expressed concern that many African countries, including Nigeria, risked sinking into critical debt servicing problems unless urgent measures were explored to dramatically increase revenues.

Discussing the fiscal challenges in more detail, the IMF chief regretted that as an oil exporter, Nigeria had not only been unable to take advantage of the current high world oil prices to build up reserves, but had also faced with low income due to the oil subsidy. some products.

With monthly fuel subsidy payments of 500 billion naira, he noted that the country could end up with a record subsidy of 6 trillion naira by the end of the year.

However, he expressed his optimism that the Dangote refinery would reduce the importation of fuel when completed, thereby reducing the subsidy burden.

In his contribution, the Director General of the Bureau of the Budget, Mr. Ben Akabueze, regretted that special interests had made the elimination of the gasoline subsidy very difficult over the years.

“When you try to remove a subsidy or raise rates, you get a summons, you see resolutions being passed asking you not to do it,” he said.

According to Akabueze, when the executive arm of government prepared the 2022 budget, it was in the knowledge that the petrol subsidy would be removed, but somehow that decision was frustrating.

Like the IMF, like the World Bank

In its latest report on Nigeria’s economy, the global financial institution, the World Bank, warned against continuing the controversial policy, warning that Nigeria’s fuel subsidy payments could have a significant impact on public finances and raise debt sustainability issues.

The global lender’s concern was contained in its new semi-annual report known as Africa’s Pulse, in which the World Bank said rising fuel subsidies are putting Nigeria’s economy at risk.

He said Nigeria is expected to grow by 3.8% in 2022, adding that as an oil-dependent country, low oil production is hampering economic recovery.

The World Bank nevertheless warned that “the risk remains high on the increase in fuel subsidies, which could weigh heavily on public finances and pose problems of debt sustainability”.

He noted that the high level of oil prices will affect countries that protect the impact on their consumers through fuel subsidies, such as Nigeria and Ethiopia, warning that the high cost of fuel subsidies, due to the rise in oil prices, could deteriorate Nigeria’s situation. budget balance.

There is cause for alarm

Despite assurances from government quarters that all is well, the Group’s Executive Director, Cordros Capital Limited, Mr. Femi Ademola, said the fear of the World Bank was very real. According to his explanation, “When proposed in October 2021, the N16.39 trillion budget had a deficit of N6.26 trillion which will be debt financed.

In January 2022, the deficit was further increased by around N1.1 trillion when the National Assembly approved a N2.55 trillion budget for fuel subsidies. The increase to 4 trillion naira would now result in an additional burden of at least 600 billion naira on the federal budget for 2022 and a reduction in the state share of the federal allocation by a balance of 900 billion of naira.

He pointed out that most of the revenue shortfall would be financed by debt; thus increasing the country’s debt burden in the face of reduced revenues accruing to the federation. This, he said, will threaten Nigeria’s fiscal sustainability and put further pressure on prices and exchange rate stability.

He felt that it is politically impossible to consider removing the fuel subsidy at this time, however, saying that if the economy is a consideration, it would be better to place the effect on the economy above the political calculations.

Fuel subsidies have been in place in Nigeria since the 1970s. It started with the government regularly selling gasoline to Nigerians below cost. But most Nigerians were unaware that this was happening.

Fuel subsidies were institutionalized in 1977, following the enactment of the Price Control Act which made it illegal to sell certain products (including gasoline) above the regulated price. This law was introduced by the regime of General Olusegun Obasanjo to cushion the effects of the global era of “great inflation” of the 1970s, caused by a worldwide increase in energy prices.

Between 2006 and 2018, Nigeria spent around 10 trillion naira (or $24.5 billion at the current official exchange rate of 411 naira = $1) on oil subsidies. In 2019 and 2020, around 3 trillion naira ($7 billion) was spent on subsidies.

Why are the grants there?

The official reason for introducing oil subsidies was to minimize the impact of rising world oil prices on Nigerians. But other factors played an important role.

The period 1970-1979 was an era of subsidies in Nigeria. Virtually everything in Nigeria was heavily subsidized – education, health, electricity, water supply, air travel and even groceries or “essentials” such as milk, sugar, rice, wheat and beverages.

In the 1970s, Nigerians coined the phrase “national cake” to describe a phenomenon through which they felt entitled to benefit from government largesse.

Various administrations have tried unsuccessfully to remove fuel subsidies since the transition to civilian rule in 1979, but have failed.

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