Nigeria: Pressure Mounts on Government to Save Oil Windfall as Price Rallies at $71

With the sustained rally of crude oil prices, there is pressure on Nigeria’s federal government to save the windfall as analysts and the organised private sector (OPS) predict a surge in revenues that will position Nigeria to attract more Foreign Portfolio Investors (FPIs).

The analysts urged the federal government to ensure that the extra revenue to be earned from the difference in the current oil price and oil benchmark in the 2021 budget is saved in the Excess Crude Account (ECA) and the Sovereign Wealth Fund (SWF).

Oil price continued its upswing yesterday with the cost of the global benchmark crude, Brent, surging above $71 per barrel after Saudi Arabia said one of its largest and most protected crude facilities came under missile attack.

Saudi Arabia said a storage tank at Ras Tanura, a terminal capable of exporting roughly 6.5 million barrels a day, nearly seven per cent of oil demand in the country’s Gulf Coast, was targeted on Sunday by a drone from the sea.

The assault followed a recent escalation of hostilities in the Middle East region after Yemen’s Houthi rebels launched attacks on Saudi Arabia.

Oil’s rally had accelerated last week after Saudi Arabia and OPEC+ made a surprise pledge to keep output steady in April.

Brent for May settlement yesterday gained 1.9 per cent to $70.69 a barrel on the ICE Futures Europe exchange after reaching $71.38 earlier, the highest since January 2020, while West Texas Intermediate for April delivery added two per cent to $67.39 after surging 3.5 per cent in the previous session.

The move prompted a raft of investment banks to raise their price forecasts, with Goldman Sachs Group Inc. estimating global benchmark Brent will top $80 a barrel in the third quarter.

The continuing increase now means Nigeria has more foreign exchange, earning about $30 extra compared with the crude oil benchmark for the 2021 budget.

In December last year, President Muhammadu Buhari signed the 2021 budget based on a crude oil benchmark price of $40 per barrel, with production for this year estimated at 1.86 million barrels per day and a foreign exchange rate of N379/$.

However, Nigeria has continued to under-produce with about 313,000 barrels daily as a result of the deal reached by the members of the Organisation of Petroleum Exporting Countries (OPEC) and their allies known as OPEC+ last year to cut back production to prevent a glut in the global oil and stabilise prices.

In separate interviews with THISDAY, the analysts said the rise in oil price would increase Nigeria’s external reserves and engender stability of the country’s currency.

They, however, urged the federal government to be prudent in the utilisation of the extra revenue.

They warned that if the federal government decides to subsidise petroleum products, there would not be any gains to the price rally.

The Head of Research, United Capital, Mr. Wale Olusi, said the rise in crude oil price would boost FDIs and urged the federal government to save excess monies from the boom.

He said: “The gain from this is that in terms of oil prices and the external reserves when foreign investors look at Nigeria, oil price at $70 means Nigeria would look attractive to them. They would be more comfortable to bring in their dollars to the Nigerian economy to invest in our T-bills or the stock market. And that way, CBN can increase our external reserves and it would be good for currency stability.

“The excess crude account is where excesses also go when something like this happens.”

He, however, stated that it is too early to assume there is excess because of the daily outputs.

He said: “If you look at the budget, it is not only about the price, it also reflects the output component. At the moment, the reason why oil prices are rallying high is because of the production cap and Nigeria was specifically applauded for not only complying with the output cap but also compelled other African countries to do the same.

“So, before we can say there is excess money, we need to find out if the oil revenue is enough to meet the budget estimate; if the budget estimate is projecting an output that is above what we are currently allowed to sell by OPEC.

“Secondly, there is also the subsidy angle that is likely to take out of what we are getting. Every time oil prices climb higher; the government makes subsidy for petroleum products otherwise they would have to increase the price. If the subsidy price is a lot, then the impact of increased oil prices is neutral because what we get, we would be spending on the consumption of fuel through subsidy.”

The immediate past President of the Chartered Institute of Bankers (CIBN), Mr. Uche Olowu, also suggested that the excess money should be sent to ECA for future savings “because what has always happened is that each time prices come down, Nigeria gets into a recession. And that is because we don’t have enough savings to cushion ourselves.”

“The excess should be put in the excess crude account for a rainy day so that it could be leveraged on to cushion the effect of any shocks. Also, there must be discipline in our budgeting, if we have budgeted at a certain price, we should work within that frame,” he said.

He also expressed doubt if the extra revenue will make the government reduce borrowing.

The Head of Consulting at Agusto Consulting, Mr. Jimi Ogbobine, said despite the rally in oil prices, Nigeria is still not out of dire straits.

According to him, Nigeria’s aggregate crude oil revenue is a function of average prices and production volumes.

“Nigeria’s informal request to revise its quota upwards was rejected by OPEC in November. Thus, Nigeria’s quota remains around 1.495m bpd, while production is currently around 1.4m bpd to 1.43m bpd. This implies that despite the price rally, the quota limits place a cap on the country’s aggregate revenue potential.

“Conversations around massive excess crude account surplus may be quite premature at this time as the price rally is largely a function of supply cuts,” he stated.

Managing Director, Kairos Capital, Mr. Sam Chidoka, said the extra cash from oil sales should be used to fund the budget deficit.

“Secondly, it should be used to grow our external reserves and lastly federal government should invest more in the Sovereign Wealth Fund,” he said.

The Lagos Chamber of Commerce and Industry (LCCI) and other financial experts advised the federal government to conserve increased revenue inflow from the surge in crude oil prices in the international oil market.

They said portions of the oil windfall should be preserved in the ECA, invested in the Sovereign Wealth Fund (SWF) and be used to finance the housing aspect of the Economic Sustainability Plan.

The Director-General of the LCCI, Dr. Muda Yusuf, told THISDAY yesterday that the government should be mindful of the volatile nature of the crude oil revenue and preserve the increased revenue in the ECA in order to build a buffer for the rainy day.

Yusuf urged the federal government to find a way to utilise some portion of the increased revenue to finance its budgetary deficit in order to reduce public borrowing and the pressure on debt servicing.

He said: “Part of it can also be invested in the SWF depending on how long the surge in price will last. These are the ways to manage surplus.”

Yusuf, however, warned that Nigerians should celebrate cautiously the increase in oil price because it would also come with the dilemma of increasing the domestic prices of petroleum products as a result of the determination of the government to abolish fuel subsidy.

“This is going to pose a big risk to the idea of deregulating the prices of petroleum products because it is going to create another circle of subsidy and the corruption that goes with it. Clearly, it is going to make the transition to a fully deregulated regime difficult. The question is: at what price are we going to sell the petroleum products?

“As we celebrate the increase in revenue, we should also remember the flip side of it in terms of the pressure, it is going to create on domestic energy prices as our transportation system is largely dependent on petroleum products, especially diesel. So, the price of diesel will go up. The costs of transportation and production will go up due to the inflationary pressure from energy prices. So, when we celebrate, we should celebrate cautiously because it comes with a dilemma,” he stated.

Similarly, the immediate past Director-General of the West African Institute of Financial and Economic Management, Prof. Akpan Ekpo, advised the government to invest the windfall from oil revenue in the SWF and use some of it to finance the housing component of the ESP and infrastructure so that Nigeria would have a stronger GDP growth in the next quarter.

Ekpo said: “It is important that we put some of it in the SWF because we must save for the rainy day. There is a spike in price now but we cannot tell what the price will be next week.

“Let us put it in the SWF so that we can invest it and get more returns. We should use some part of it to finance the ESP, which is the thing that gave us the 0.11per cent growth in GDP dragged the economy from recession. We should spend on the housing component of the ESP because of its trickledown effect that can generate employment and help us be on a positive recovery path.”

He, however, expressed fear that oil windfall might distract the government from some of the purposeful things it started to stabilise the economy.

“I am somehow unease each time oil price goes up because we quickly abandon what we have been doing at the slightest realisation that there is money now to spend. So, there are some times I wish that the oil price will not go up so that we can be serious.

“The problem with oil revenue is that it is very volatile and unpredictable. So, we cannot plan an economy based on an exogenous source of revenue that we have no form of control over. That is why I panic whenever the oil price goes up because it lures us from what we have been doing,” he added.

The Chief Executive Officer of the BIC Consultancy Limited, Dr. Boniface Chizea, also urged the government to keep the inflow in the ECA to ensure that “the money is not simply allowed to flow into the treasury where it could be wrongly applied or possibly embezzled.

“If possible, a supplementary budget should be approved before the money is spent. It is also ill-advised as we battle with properly exiting the recession to save money. Therefore, I recommend planned expenditure to continue to give a shot in the arm for the economy to grow.”

On his part, the Director-General of the Nigerian Employers Consultative Association (NECA), Mr. Timothy Olawale, said while the oil price rise could mean more revenue for the government, it might not be significantly felt because the government might not have the political will to save the windfall for the rainy days.

He said: “Ours is the most poorly governed sovereign fund savings. Though we have the ECA as well as the SWF, the sharing provisions and the political will to utilise the excess accrued for savings or infrastructural development cloud our developmental minds. We called for more political will towards addressing the savings of the excess in times like this as the raining days like this might not last long,” he said.

Nume Ekeghe, Dike Onwuamaeze in Lagos and Emmanuel Addeh in Abuja

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