Vice President Yemi Osinbajo was a guest at a policy dialogue organised by the Lagos Chamber of Commerce and Industry (LCCI) where he revealed Nigeria’s policy strategies in the face of unsettling oil prices, Chika Izuora writes.
Vice President Yemi Osinbajo did not mince words when he told an audience, mainly technocrats and captains of industry, including business mogul, Aliko Dangote, that Nigeria in the past 15 months has, no doubt, gone through what is probably its most challenging period in recent history.
First, just by way of providing a context, Osinbajo recalled some of the challenges which the present administration were confronted with on assumption of office.
The immediate problem, he said, was the sharp decline in oil prices and production, and the lack of savings to cushion the impact which the crisis that affected nearly all the sectors of the economy caused.
Such impact is as reflected in the declining external reserves, scarcity of foreign exchange, fuel supply shortages, derelict infrastructure, especially crippling power outages, mounting salary arrears at both state and local government levels, increasing unemployment and poverty levels, failing business confidence and vicious cycle of corruption, evidenced by huge leakages, fiscal misdemeanours and indiscipline. All these things have been compounded in various ways due to continued weakness in the overall global economy and inherent structural deficiencies in the domestic economy. As a result of this, he said, the gross domestic product declined from 6.3 per cent in 2014 to 2.15 per cent in 2015 and -0.36 per cent in Q1 2016.
Second, insecurity, especially in the North East, worsened by the corruption in defence procurement, confronted the government within the period while foreign direct investment (FDI) which stood at about $395 million in Q1 2015 declined by 56 per cent to $175 million by Q1 of 2016. Also he said that the foreign portfolio investment which averaged $621 million in Q1 of 2015 had declined to $90.3 million by Q1 2016.
With the decline in the value of the naira, the value of equities have been eroded by over 43 per cent, closing at a market capitalisation of $48 billion in May 2016 as against $84 billion in the same period of 2014, while inflation stood at 16.5 per cent. There was also a depreciation of the naira and increase in importation costs due to the scarcity of foreign exchange (FOREX).
Osinbajo further lamented the declining earnings from oil in the past eight months due to the vandalisation of pipelines and export assets in the Niger Delta with power output falling from a historic high of 5,000 mega watts (mw) in February to about 2,500mw in recent times on account of over 60 per cent loss in gas production due to the vandalisation of pipelines. Government, he said, in order to tackle these problems undertook some specific interventions which were prioritised and reflected in various ways in the 2016 budget and its strategic implementation plan. To safeguard jobs and prevent further increases in unemployment rates, the federal government paid priority attention to assisting the states and local governments so that they could pay the salaries of their workers which were several months in arrears.
Government also came up with three such interventions, including the latest loan of N90 billion as part of a fiscal responsibility plan for states. In order to access these funds, states were required to comply with a fiscal responsibility plan which includes cleaning up their payrolls, using the TSA and showing clear plans for improving internally generate revenue. These interventions, he stated, helped to boost household and social spending which were key steps to preventing the economy from falling into deep recession.He noted that the deregulation of the downstream petroleum sector equally had significant increase in the availability of premium motor spirit (PMS) also called petrol throughout the country. This helped to achieve a price of N145 per litre as against over N200 per litre being paid at most parts of the country prior to the deregulation.
The action further led to a reduced daily demand for the product from 1,600 trucks to 850 trucks per day, thus resulting in the savings of N1.4 trillion on subsidy payments, conserving budget resources and reducing demand for FOREX required to import such volumes which were also smuggled to neighbouring countries because of the previous price differential.
The vice president also explained that the recent introduction of a flexible exchange rate regime has helped to ease the pressure on the external reserve, adding, “It is of course true that the immediate effect is depreciation of the naira and some of the consequences for inflation, etc, but we expect that with the greater clarity we are seeing in the implementation of the policy by the Central Bank of Nigeria, the FOREX market will stabilise, and confidence will be restored.”
Speaking further, Osinbajo said that there will be an increase in the supply of FOREX, especially due to inward investment and increased receipts from non-oil exports and that there is already anecdotal evidence that Nigerian agricultural products are being exported to neighbouring countries in substantial quantities and credible sources in the banking sector have also informed us about incipient responses, in terms of portfolio and FDIs.
“We had also pledged to keep capital spending in the budget at a minimum of 30 per cent. This is a target that we are determined to keep since it is an investment that grows an economy. Accordingly, we have already made capital releases of N332 billion which is more than the entire amount released last year for capital expenditure, with another N100 billion set to be released in the next few days. The main sectors for which the funds have been released are power, works and housing, defence, transportation and agriculture,” he said.
Osinbajo added that government has continued to support and encourage massive investments by private investors and key employers of labour as demonstrated by the development of the Dangote Refinery, the Indorama Eleme Petrochemical facilities, among others. He also pointed out that some of the interventions of the government has resulted in improvement in the power sector as he noted that the power situation had started to improve after the administration came into office.
“The data available shows that average generation rose from 3,565mw from January to May 2015 to as high as 5,000mw in February 2016,” Osinbajo said, but added that the situation, however, has become more challenging due to the recent spate of insecurity in the Niger Delta, impacting on the supply of gas for electricity generation. The sabotage of the Forcados Export Terminal alone caused the loss of 40 per cent of gas supply to power plants. However, efforts are underway to continue to diversify sources of energy, including hydro, biomass, coal and solar amongst others, he assured, stressing that the recent signing of agreements with 14 solar companies, which is expected to add 1,125mw to the national grid, is an example in this regard.
Unsettling oil market price
The Paris based International Energy Agency (IEA) came out with a bullish prediction on oil which supported the prices last week. In its latest oil market report, the IEA predicted that the global supply of crude oil will fall behind the global demand by the third quarter of 2016. The IEA said that crude oil supply will fall behind the demand by around 1 million barrels a day by this September, even as OPEC produces oil at record levels.
This means that according to the IEA, there shall be no ‘oversupply’ of crude oil by the end of 2016.
The Paris based agency believes that heavy production cuts by non-OPEC players and a robust global oil demand will be responsible for the supply- demand re-balancing of crude oil.
Source : Leadership