Over-reliance on crude oil as the dominant source of revenue has rendered the Nigerian economy perennially vulnerable to the volatility of the oil market.
In recent times, the shale revolution in the US and the re-entry of Libya and now Iran to the market has tipped the supply of crude oil and as a result put the price of the commodity under pressure, and thereby resulting to slash in the country’s crude oil benchmark for 2016 budget.
To mitigate the challenges of the declining crude oil prices on the 2016 budget, experts emphasized the need for an appropriate economic policy framework that could inspire investors’ confidence in the country.
They also advised the Federal Government to lay emphasis on increasing the country’s crude oil production profile to be able to make the oil sector’s obligation in the 2016 budget.
Head of Energy Research, Ecobank Group, Dolapo Oni, told The Guardian that there is need for the government to increase output of Nigeria Liquefied Natural Gas (NLNG) to boost revenue for the country.
He said that the reduction in Nigeria’s oil earnings from N1.64 trillion in 2015 to N820 billion in 2016 budget was predicated not only on the low oil prices but largely on the country’s inability to ramp up production like the rest of the world during these times.
He added that while the rest of the world has ramped up output and are now looking to freeze output at what are perhaps some of their highest ever level of output, the country is struggling with roughly about 1.8 million bpd due to various fields shut down or shut out by other issues.
Dwelling on the impact, Oni stated: “The government is going to need a lot of revenue from other sources. Although they haven’t really provided the best of environments for other non-oil exports/businesses to thrive, they will have to look at raising more taxes via increasing the number of people and companies captured in the tax bracket.
“They may also increase VAT as already announced as well as introduce some other taxes to supplement revenues. But considering the downturn in the economy, these are not likely to yield so much because the economy is already seeing GDP growth of two to three per cent. So raising taxes will be a challenge, especially when you also consider the growing unemployment in the economy, which means personal income taxes will take a hit”.
He said that the lower revenue could also mean the country is unable to adequately fund major capital infrastructure because it tend to wait for major earnings before it allocate funds to capital expenditure. “More importantly, the government inherited debts to some contractors for some projects executed in the past thus some of the funds meant for capex now may have to first go into repaying those contractors”, he noted.
Oni lamented the limited options available to the Federal Government for covering the shortfall in oil prices. He noted that government basically has to find ways to increase crude oil production. “An additional 300,000 to 400,000 bpd could translate to more than 15 per cent increase in oil revenues for us at current prices, assuming exchange rates stay the same.
“Another thing is to increase output at the NLNG so they can earn more dividends. More importantly, rather than keep investing more money amiss in the refineries, we focus on strengthening our logistics for distribution to reduce pipeline vandalism, fully deregulate the market to ensure government has no involvement beyond monitoring and licensing for the downstream sector. These will make the sector a pure revenue earner for the government and not a drain on resources.
“Government also needs to look at ways to improve the movement of other goods through the ports. Most non-oil exports face major hurdles in getting their goods out of the ports. These are part of the reasons why non-oil exports have struggled in Nigeria and instead we depend almost fully on oil to earn foreign exchange. Giving Customs an imperative to ensure non-oil cargoes move within shorter time frames alone could boost foreign exchange revenues”.
Speaking also, the Director-Generel of Lagos Chamber of Commerce and Industry, (LCCI), Muda Yusuf said that the budget also gives priority to infrastructure as well as security.
This, he noted is a step in the right direction given the high infrastructure deficit that we have in the economy and having regard to the security issues we are grappling with in parts of the country.
Yusuf stated that the debt service provision of N1.5 trillion is however of serious concern. It shows that we are operating a debt profile that is not sustainable. “This amount is about 35 per cent of revenue, which has already exceeded the global threshold for debt sustainability.
“Although debt service is an obligation over which we have very little choice, but the lesson is that we need to review our debt management strategy to reduce the burden of debt series on our finances. The opportunity cost of current debit service provision for the economy is very high”.He added.The DG noted that the drop in oil revenue is a contributory factor to the high deficit that we have in the budget.
“The immediate implication is that the level of borrowing domestically and externally has increased, that also has implications for debt service burden.
“Because of the increase in borrowing, the impact of the reduction in oil revenue has been mitigated. Besides, there is already an increased efficiency and reduction in leakages in the management of government finances. The introduction of the TSA has also boosted government revenues, so all of these will make up for the shortfall in oil revenue.
“Above all, there is need for an appropriate economic policy framework that could inspire investors’ confidence. Private capital is crucial to the progress and diversification of the economy. Only the right mix of policies would make this happen. There is a need to urgently address the current policy shortcomings in the foreign exchange management; undertake urgent reforms in the petroleum downstream sector; review existing trade policies and promote investment friendly tax policy”, he said.