Oil price, power, others to determine economic outlook The 2015 general elections, falling oil prices and increase in gas price are among the factors that will shape the Nigerian economy in the coming year; EVEREST AMAEFULE, IFEANYI ONUBA and OKECHUKWU NNODIM write The sharp fall in global oil prices in the fourth quarter of 2014 will no doubt have harsh impact on the Nigerian economy this year. According to the World Bank, declining oil revenues have placed increasing pressures on government budgets, with only slightly above 50 per cent of capital votes released to line ministries by the end of September. In response, the Federal Government had unveiled austerity measures aimed at cushioning the adverse effects of the oil price fall since the country’s economy depends largely on proceeds from the sale of oil. Falling from over $100 to $57 per barrel on Tuesday, December 29, 2014; the prices of global crude oil will be one major factor that will shape the Nigerian economy this year. For the Chief Executive, Financial Derivatives Company, Mr. Bismark Rewane, the austerity measures unveiled by the government was a good start even though the measures might not actually absorb all the impacts of the price decline. According to him, the most important thing is the fact that the government has come to accept that it has to do something with respect to the falling oil prices. “What we are seeing now is not a short-term phenomenon. Whether the therapy is adequate is another issue. But I think it is a good move and the government has not ruled out other moves,” he said. Increase in the price of gas will also play a crucial role in determining the direction of the nation’s economy in the days ahead. Last week, the Federal Government approved the increase in the price of gas to the power plants from $1.5 to $2.5 plus $0.8 for transportation, making a total of $3.3 per million British thermal unit. This, according to operators in the power sector, will help improve electricity generation, a development that will impact on the larger economy positively. The Chairman, Nigerian Electricity Regulatory Commission, Dr. Sam Amadi, told one of our correspondents that the increase in gas price would not only attract investors to the oil and gas sector, but also ensure adequate power supply to industries. He said, “With the new gas price, we expect some increase in power production. Already, some of the gas suppliers have made commitments but we are certain that this new gas price will help in the longer term, because people will now on that basis begin to make investments in gas infrastructure, knowing that the price is good and will be indexed. “It has the potential of enhancing the capacity of gas to power going forward. It will unlock the sector for more investments, and in the interim, it will ensure that we have more gas to power our generators. But ultimately, the value is down the road when these investments have been made and are mature. “Transmission is a bottleneck but I think it is a simple bottleneck. The Ministry of Power should remove their hands from the transmission company simply by allowing it have a board with clear directives. When people talk about investment in transmission, what they really want is clarity in transmission investment recovery. “They want to see how much is the wheeling charge; and if they invest in the transmission, will they be allowed to recover the money? They want to see a bankable framework and that simply means that the risks are not there, whether you have a management contractor or government employees that are running the transmission company.” The policy directives highlighted by the Central Bank of Nigeria in November will also play crucial roles in determining the direction of the economy in 2015. At the end of Monetary Policy Committee meeting presided over by the Governor of the CBN, Mr. Godwin Emefiele, an increase in the Monetary Policy Rate from 12 per cent to 13 per cent was announced. The MPR is the anchor rate at which the CBN, in performing its role as lender of last resort, lends to banks to boost liquidity in the banking system. The governor said given the level of excess liquidity in the banking system, it became imperative to address the sources of foreign exchange demand pressure. The bank finally bowed to pressure to devalue the naira by moving the midpoint of the official window of the foreign exchange market from N155 to N168 to a dollar. Another decision reached at the meeting was an increase in the Cash Reserves Requirement on private sector deposits from 15 per cent to 20 per cent. The bank also retained the public sector CRR at its current level of 75 per cent. While the committee believed that the cause of the volatile foreign exchange scenario in the wake of the oil related external shock was driven by high liquidity in the banking system, financial analysts are of the opinion that the decision will further increase the cost of doing businesses in the country. A Senior Lecturer at the Department of Accounting, Nasarawa State University, Keffi, Dr. Uche Uwaleke, predicts an increase in inflation rate to about 10 per cent this year. He said since inflation would increase, coupled with high lending rate and naira devaluation, Nigerians should brace for a drastic reduction in their purchasing power. Uwaleke said, “I see headline inflation, which is now in single digit, inching up towards 10 per cent next year. And that will be fuelled by the spending next year owing to political activities. A lot of money will be pushed into the system, and coupled with the naira devaluation, we will continue to depend on imports. “The devaluation of the naira will certainly lead to an increase in the prices of goods and services. To subdue inflation, the CBN will react by increasing the benchmark interest rate, and I see them increasing the MPR when they meet again. “With inflation, there will be a further reduction in purchasing power and the continuous fall in oil prices will affect the efforts of the government at creating jobs in 2015 because already, the SURE-P funds have been affected.” As a result of these factors, Uwaleke argued that the ability of both the public and private sectors to create the much needed jobs would be affected. He added that the N220bn intervention fund by the central bank for Small and Medium-scale Enterprises, though commendable, would not achieve significant results. The lecturer said, “You will discover that fewer jobs will be created in 2015, and if you consider the fact that 1.8 million people are set to enter the labour market every year, you will discover that whatever little jobs that are created will be offset by those coming in. “The N220bn CBN intervention fund may not be too significant when you look at the amount, because we are talking of 36 states, with each state getting about N2bn. “So, if you look at that, the size of the intervention is not sufficient to make any meaningful impact even though it is a step in the right direction. We want to see that scaled up.” Also, analysts at BGL Plc led by the Head, Research and Strategy, Mr. Femi Ademola, said that about N400bn would be withdrawn from the banking system through the increase in the CRR on private sector funds. Ademola, in a report on the 2015 outlook, explained that the anticipated withdrawal of the N400bn could translate into a reduction of about N42bn in industry’s profits in the financial period. The reduction, he added, would be further compounded as a result of the opportunity cost of 10 per cent to 12 per cent rates on treasury bills and money market instruments. He argued that since the market was expected to correct in the near term, discerning investors would take the opportunity of the bargain prices to re-enter the market, thus benefiting from potentially significant returns. Ademola said, “The reality in the economy suggests that the policy will be non-accommodating in 2015. This will be dictated by the eventual trend of the oil price and the consequence effect on the government primary balances, foreign exchange rate volatility and the foreign reserves. “The current level of external reserves at $36bn can cover seven months of imports. However, this will deteriorate to below $30bn before the end of the second quarter (of 2015) if the oil price trend continues below $65 per barrel. “At that level, no monetary reversal is expected regardless of the pro-growth and pro-employment stance of the governor of the CBN.” The BGL report also predicts a further increase in interest rate for the most part of 2015 if macroeconomic stability is threatened by inflation, low oil price and weak foreign exchange. It said a further increase of 14 per cent in late 2015 was plausible. In his analysis of the CBN policies, the Lead Director, Centre for Social Justice, Mr. Eze Onyekpere, said as an import-dependent country, the depreciation of the naira would lead to increased costs of raw materials and finished goods. According to the World Bank, the pre-election environment in Nigeria will pose some particular challenges for sustaining prudent fiscal policy, noting that during the run-up to the 2011 elections, a major fiscal expansion almost destabilised the economy. Apart from the inflationary impact increased expenditure will have on the economy, the outcome of the elections will to a large extent determine the shape of the economy in 2015. This is barring all possible post-election violence as was witnessed in some parts of the country after the 2011 presidential polls. Should President Goodluck Jonathan win the election, the possibility is that he will become more assertive. Since he does not have any more election to fight for in the future, he may muster the courage to remove any vestige of petrol subsidy if falling oil prices have not removed all of it. Given the falling oil prices, citizens should prepare to be haunted by the tax authorities. The possibility is that the haunt will be delayed until the elections are over. Nigerians should also be prepared to see a considerable rise in the country’s debt profile. By the end of 2014, about 70,000 public workers had not been paid for three months, according to reports. Should Jonathan win the election, he may also muster the political will to downsize the workforce. Of course, a lot of money will be spent to turn these workers into active players in the private sector. However, should the Presidency turn the way of the All Progressive Congress, some of the difficult decisions will have to wait as a new government headed by General Muhammadu Buhari will not want to appreciate the electorate with measures that have the capacity to inflict hardship on them immediately after taking over on May 29. Copyright PUNCH.All rights reserved. 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Posted on: Wed, 31 Dec 2014 23:27:27 +0000
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