The International Monetary Fund (IMF)prediction that Nigeria may be heading for its worst recession in 2020 appears unacceptable to most Nigerians who in the face of the COVID-19 pandemic are going through difficult times.
These fears are often heightened by concerns over how the post COVID-19 economy would look like, should the IMF prognosis become a reality.
Indeed Nigeria was party to a recent decision by the Organisation of Petroleum Exporting Countries (OPEC) which at its 10th OPEC/NON-OPEC Declaration of Cooperation Ministerial Meeting to conclude the Curtailment of Crude Oil Production by 9.7 million per day.
Prior to the cut in oil production figure, the country had slashed its 2020 oil price budget benchmark from $57 per barrel to $25 in order to adjust to the drop in global oil prices now trading slightly above $30 per barrel.
With the OPEC deal to cut members’ production quota, the Minister of State for Petroleum Resources, Timipreye Sylva, said Nigeria’s daily production would drop by almost 300,000 barrels from the proposed revised volume.
But as part of measures to readjust its working figures, the Federal Government went a step ahead to revise its budgetary proposal, with crude oil price benchmark reduced from the previous $57 per barrel to $25, while daily oil production volume was cut from 2.18 million barrels to 1.70 million.
Already, business across value chains, including multinationals, Small Medium Enterprises and Medium Small Micro Enterprises (MSMEs) have all gone under, operating far below capacity utilization.
The drop in oil prices have virtually affected all facets of the economy as the Federal Government has cut down on capital expenditure having also reached out to the IMF to drawdown its $3.4bn savings in addition seeking further support from all other multilateral agencies.
Minister gives breakdown of deal
Nigeria in a bid to shore up oil prices and oversupply in the oil market on April 12th, 2020, joined its other OPEC+ counterparts to bring into effect the agreement to cut 9.7 million bpd following the alignment of Mexico.
The intervention of the United States of America resulted in Mexico agreeing to a cut of 100,000 bpd and to be complemented by an additional 300,000 bpd by US Producers. This will enable the rebalancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term.
According to the Minister of State for Petroleum Resources, Mr.Timiprye Sylva, the development promises an appropriate balancing of Nigeria’s 2020 budget now adjusted to $20 per barrel.
‘‘As agreed, Nigeria will join OPEC+ to cut supply by 9.7 million bpd between May and June 2020, about 8million barrels per day between July and December 2020 and 6million barrels per day from January 2021 to April 2022, respectively.
Based on reference production of Nigeria of October 2018 of 1.829 million barrels per day of dry crude oil, Nigeria will now be producing 1.412 million barrels per day, 1.495 million barrels per day and 1.579 million barrels per day respectively for the corresponding periods in the agreement.
This is in addition to condensate production of between 360-460,000 bpd which are exempt from OPEC curtailment.
2020 Budget implementation/revenues at crossroads
Going by these developments, Nigeria’s revenue flow may have been impacted adversely with daily oil production capacity for the rest of the year significantly below the revised volume of about 1.7 million barrels contained in the proposed amended 2020 Appropriation Act which is now 1.94 million bpd.
Following the economic impact of the coronavirus pandemic, the Nigerian government had announced a N71.6 billion cut in its 2020 budget, to about N10.523 trillion as against the initial N10.594 trillion earlier passed by the National Assembly and signed into law by President Muhammadu Buhari.
Chief Sylva, who was the head of the Nigerian delegation to the meeting said with a daily production cut of about 300,000 bpd, Nigeria would now be producing 1.412 million bpd between May and June 2020 in the first phase of the group’s agreement.
He said between July and December 2020, the country would produce about 1.495 million barrels per day in the second phase of the agreement, and another 1.579 million barrels per day between January 2021 to April 2022 in the third and final phase of the agreement.
Despite the significant difference between the new OPEC output ceiling and the proposed production capacity in the 2020 budget, the minister expressed optimism Nigeria would still break even with an average of 360,000 and 460,000 bpd of condensate which OPEC production quota calculation does not usually cover.
“It is expected that this historic intervention when concluded will see crude oil prices rebound by at least $15 per barrel in the short term, thereby enhancing the prospect of exceeding Nigeria’s adjusted budget estimate now reduced at $25 per barrel and crude oil production of 1.7 Million barrels per day.
“The price rebound may translate to additional revenues of not less than $2.8 billion for the federation,” Sylva added.
Meanwhile an energy analyst and Partner at Bloomfield Law Practice, Mr.Ayodele Oni, warned that the effect of these adjustments could be multi-dimensional as the effect would lead to a reduction in the nation’s oil receipts and ultimately underperformance of the 2020 budget.
He also warned there may be implications for forex availability since oil sales is the primary source of forex, adding that a reduced budget would also imply that the economy will shrink as earnings reduce. While agreeing with Sylva that the country may recover some more grounds in the case of a rebound, Oni said Nigeria has rejigged its budget in anticipation of a possible negative COVID-19 aftermath, including a glut in global oil sales and significant drop in crude oil prices.
‘‘In the readjusted budget, oil price benchmark is $30 and the production benchmark is rebased to 1.7mbopd. Accordingly, the impact may not be severe on the budget, however there may be an impact on forex availability since oil sales is our primary source of foreign currencies. A reduced budget would also imply that the economy will shrink as earnings fall.
Strategies to mitigate economic consequences of COVID-19
On March 18, the Muhammadu Buhari administration announced some significant changes to its 2020 budget as part of measures to contain the effect of coronavirus on the nation’s economy.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, said the government will implement a 50 per cent cut in revenue from privatisation proceeds.
Ahmed said the Federal Executive Council approved reductions in capital budget by 20 per cent, and 25 per cent cut in recurrent expenditures.
She said: “I’m pleased to report that just yesterday President Buhari approved a number of measures for us to implement. These measures include the introduction of PMS price modulation mechanism. The reason being that at the low crude oil price of $31 to $32 per barrel, there’s no underrecovery. The underrecovery is right now zero, in fact, we are at an overrecovery stage, meaning the PMS price will be reduced to reflect the reduced price of the crude oil in the international market.”
Consequently, Nigeria’s oil firm, NNPC, announced a reduction in petrol price from N145 per litre to N125.
“Mr President also approved that we should cut down on the size of the federally funded upstream projects of the petroleum sector. The reason being that we want to be able to get more revenue, by less deductions from NNPC.
The reduction of crude oil price from the $57 per barrel to $30 means that we are going to get much less revenue, almost 45 per cent less than we planned hence we have to amend a lot of projections in the budget as well as in EMTEF to reflect current realities,” the minister said.
“The President also agreed that we should do a scenario to reflect what the actual position will be with a $30 crude oil price, that is we were to anticipate what will be the worst case scenario and we’ve worked on that scenario which necessitates that quite a number of expenditures needed to be cut down, even as we review how we can enhance revenues that are not directly affected by the crude oil price decline.”
She said the government was also looking at enhancing production to make sure that at the minimum, the 2.18 million barrels that is in the budget as production volume is realized, adding that the NNPC has directives to that effect.
“We also need to adjust Customs revenue, which has been budgeted for at N1.5 trillion, but we are adjusting it downwards because we anticipate that trade volumes will reduce and once trade volumes reduce, Customs revenue will be significantly impacted as a result.
We also have approvals to reduce the projected revenue from privatisation proceeds by as much as 50 per cent because, again, with the slow down in economic activities, we are anticipating that the sale of independent power plants might not be fully realized as planned for in the budget.”