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The persistent deterioration of the global oil market over the past month threatens the implementation of Nigeria's budget, especially the financing of investment projects, experts told Daily Trust yesterday.
The Brent international benchmark, the price of Nigerian oil, plunged to $ 51 a barrel this weekend, after hitting a record $ 86.74 a barrel at the beginning of the last four years.
"The magnitude of the movement is creating unpleasant memories for 2014 and 2015," said Michael Tran, director of global energy strategy at RBC Capital Markets, citing the latest slowdown in the oil market.
The drop in prices, which was below the proposed threshold of $ 60 per barrel for the 2019 budget, sparked a new wave of concern over the impact on the federal government's economic projections for 2019.
Although oil has maintained a gain of $ 59.29 the previous day, the efforts of the Organization of the Petroleum Exporting Countries (OPEC) and its partners will reduce supplies enough to dispel fears of a surplus crude oil at the same time. their meeting next week.
But some analysts have said the price could fall further as the winter cold rushes.
The financial experts said the authorities should be worried about the threat that the fall in prices will weigh on the good execution of the 2018 and even 2019 budget, as well as on the overall revenue of the government.
The Federal Executive Council (FEC) last month approved the proposed 8.73 billion Naira for the 2019 budget and set the price of crude oil at $ 60 per barrel, compared to $ 50.5 for the 2018 budget.
There is no reason to alarm – NNPC
However, the spokesman of the Nigerian National Petroleum Corporation, Ndu Ughamadu, said that there was no need to alarm them.
"Oil prices are determined externally by the forces of demand and supply, and all of this is accounted for in our production and marketing of crude oil, so there is nothing about it. Strange, "he said.
The head of investor relations at the United Bank for Africa (UBA), Mr Abiola Razaq, said the lower prices would have no impact on the budget, whether from the point of view of view of funding or collection.
"It is already threatening the budget benchmark and the government's overall revenue for 2019. This also has consequences for the naira, as oil revenues remain the main source of foreign exchange supply for our country, which means that A lower oil price has negative consequences for the country, and this also affects the central bank's ability to respond to foreign exchange demand, "he said.
He said this period offered the government a golden opportunity to develop alternative sources of income.
"We need to further diversify the economy away from oil and this goes beyond a statement.We need action, the government must create ways for more economic activities come true, as the diversification of the government's tax revenues beyond oil.You can not expect to generate more non-oil taxes without increased economic activity, "he added.
OPEC is meeting next week in Vienna and analysts and economic operators have predicted that the meeting would produce a reduction in production to keep prices up, but the expectations are not really reassuring.
"We believe that OPEC should rethink and if we get another agreement similar to that of OPEC about two years ago, this could also help stem the decline in oil prices," he said. Razaq.
Why the price of oil drops
Under pressure from US President Donald Trump, Saudi Arabia reached an all-time high earlier this month.
This is essential because Saudi Arabia is the world's largest exporter and the only country that can significantly increase its production. Russia and the United States have also accelerated production, according to a CNN report.
But the Trump administration shocked the oil market earlier this month by adopting a softer approach to Iran. Temporary derogations were granted, allowing India, China and other countries to continue buying Iranian crude.
The Iranian deal left the oil market suddenly confronted with an oversupply of supplies. The OPEC is now under pressure to significantly reduce production in Vienna to help place a floor under the market.
"Foreign reserves, capital projects to be allocated"
An expert in financial economics said that the current drop in the international price of crude oil would have adverse effects on the economy, including the possibility of a reduction in the country's foreign exchange reserves and the realization of projects. # 39; investment.
Yesterday, Professor Mohammed Yelwa, an associate professor of financial economics at the University of Abuja, said yesterday that, if the price of a barrel of oil fell below the $ 51 threshold set for 2018 the barrel, the federal government should prioritize capital projects.
He said the government needed to demonstrate clear budget discipline by cutting costs and executing projects that will have a positive impact on the economy.
The donor called on the deputies in the National Assembly to exercise fiscal prudence in order to make up for the potential budget deficit due to the drop in the price of oil on the international market.
We monitor fluctuations – Minister
Finance Minister Paul Ella Abechi, Special Adviser on Media and Communications, told our telephone correspondent that the ministry was monitoring oil prices and would make a decision based on the trend.
"We have seen a drop in prices, the system is unstable, we have seen what Trump is doing with the Saudis, but will it be a sustainable solution, we do not know," he said.
He added, "We are tracking issues very closely, but we are basing our budgets on trends over a long period of time, and we are also following World Energy Outlook (WEO)." When we develop a budget strategy paper, we look at what the World Bank, WEO and OPEC posted the expected trend. "
He observed that for next year, the World Bank was forecasting $ 55 a barrel, but this remains cautious.
"But let's see what happens if in three weeks and the price of oil continues to fall, these agencies will establish a new forecast that will guide us," he said.
"If you look at the trend under Trump, you'll notice spikes, he seems to like volatility, but even in this volatility, we will continue to monitor closely the trend to recalibrate or consider it in the short term," he said. he also declared. .
Why FG should be serious about diversification – Expert
Professor Ueff Uwaleke, professor of capital market at Nasarawa State University, told The Daily Trust that the fall in oil prices was a source of concern, because of the dependence Nigeria's excessive exposure to oil.
According to him, if Nigeria's economy were more diversified, it would not be under the pressure of oil volatility on the international market.
However, he said that for the future, especially in 2019, the government should reduce its spending on recurrent and capital projects.
According to him, the government should significantly reduce its overheads and also look for ways to finance some of its infrastructure projects through private sector investment through public-private partnerships (PPPs).
While calling on the government to take the issue of economic diversification seriously, he warned against new borrowing to finance the budget.
Professor Uwaleke also advised the federal government to accelerate the privatization of moribund federal assets and use the funds to finance the budget.
He also said that the drop in oil prices should not affect the negotiations on the minimum wage.
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