Wednesday, December 24, 2008

Lessons from oil price crash

The recent report that Nigeria has recorded a huge loss of N177.52bn in revenue accruing to the Federation Account for November is not a cheering news at all. The loss is as a result of the current flunctuation in oil prices in the international market. Oil earnings account for about 90 percent of revenue accruals to the Federation Account. By any reckoning therefore, the loss has far reaching implications for the revenue and expenditure profile of government and the economy in general.

According to a statement by a sub-committee of the Federation Account Allocation Committee (FAAC), accruals to the Federation Account witnessed a heavy drop from N530.86bn in October, to N353.34bn in November. The FAAC is a government agency charged with the duty of monitoring the collection of revenue to the Federation Account as well as revenue sharing among the three tiers of government. The statement signed by the Accountant General of the Federation, Alhaji Ibrahim Dankwabo, says the slump in revenue from the oil source is worrisome.

This piece of news is a mixed grill for Nigeria. This year alone, oil prices have reached an all-time high of about $170 per barrel. As at last week, crude price hovered between $36 and $45 per barrel. This amounts to a drop of about $125 per barrel between June and August, this year. The Organisation of Petroleum Exporting Countries (OPEC) has said that it intends to cut production in order to raise prices, saying its member nations lose N2.8bn daily as a result of the dip in prices of oil in the international market. This is not unconnected with the recent global financial meltdown, shrinking capital flows and tightening credit conditions that have brought some economies of the world into a recession.

However, the FAAC report should be an eye-opener that requires fiscal ingenuity by government for the rainy day. This development, it seems, has come with its foreboding implication, which must not be lost on the managers of our economy. What this means is that the 2009 budget may run into troubled waters even before the implementation begins. The budget was based on a benchmark of $45 per barrel.

With the expected shortfall in revenue if the slide in oil prices persists, government may find it difficult to meet the broad objectives of the 2009 budget. The likely consequence is that government may resort to drawing down on the external reserve which currently stands at $58bn, from $62bn in September. This could lead to excessive borrowing from external agencies and the Central Bank of Nigeria (CBN). Also, this could result in higher inflation rate and deficit financing of the budget.

None of these augurs well for the economy, both in the short and long term. How, therefore, can government keep an even keel without a desultory effect on the economy that is much dependent on oil? This is the time for government to put on its thinking cap and begin to look for other alternative sources of revenue that are not subject to the vagaries of the international oil market.

The government, as a matter of national expediency, should also drastically reduce the expenditure on political office holders. At present, so much is voted for perks of office at the detriment of matters that require immediate national attention. Due to the drastic drop in oil revenue, government’s overheads need to be reviewed downwards in line with the realities of the present oil price fluctuation.
More than ever before, prudent fiscal management is imperative. That, to us, is the lesson from the uncertainties that beset the global oil market.