Oil price slump will spell doom for the economy

Gbenga Adesanya2

Mr. Olugbenga Adesanya, President and CEO of Diekolop Konsults Limited, a renewable energy and petroleum products consultancy firm is worried by the crash in the international price of crude oil, Nigeria’s cash cow, which has put the country’s economy in dire strait. He cautions that the country faces a stormy year ahead as the current oil price slump is not likely to abate soon. He adds that without urgent review and reduction of the recurrent expenditure in the 2015 budget as well as economic diversification, the impact could be more severe. In this interview with Olisemeka Obeche, Mr. Adesanya explores the issues trailing the oil price slump and suggests how the country can weather the storm. Excerpts:

What does the continued slump of oil price in the international market beyond the first quarter of 2015 portends for the Nigerian economy?

The persistent slump of oil price will spell doom for Nigeria’s economy and inflict more pain on the people. We must prepare our minds for a long-time decline in crude oil pricing because it is not likely to abate in one year. In my projection, the least expectation is one year and the maximum period it could take oil price to reverse is three years.

For this quarter, it will spell doom for Nigeria because it is a new year and the 2015 budget has not been passed into law. The 2015 budget presented by the Finance Minister, Dr. Ngozi Okonjo-Iweala is based on $65 per barrel. The Senate Committee on Finance has fixed the benchmark on $40 mpb. But I am predicting that the price of crude oil in the international market will fall below $40 per barrel in the next few months. And if that happens, then the Capital Expenditure (CAPEX) for the nation is in jeopardy. Already, the CAPEX is less than 25 percent of the annual budget; it is about 23 percent while recurrent expenditure is between 77 and 78 percent. What that means is that projects, especially infrastructure, will suffer a great deal in Nigeria this year and beyond.

Are there measures government can take quickly to mitigate the impacts of the oil price slump on the economy?

Yes, there are possible measures to take but that depends on the political will and finding the right policy therapy. To start with, Federal Government should go back to perspective planning; return to the drawing board of abandoned national development plan. Of course, Nigeria used to have carefully developed national development plan which served as a guide to its development trajectory. We need to revisit that to ensure that our development policies fall into such plan.

It is true that President Goodluck Jonathan has introduced a five-year development cycle, which is commendable, but there is no time chart. For a start, the 2015 budget has to be redesigned in such a way that the government has to cut down recurrent expenditure to 40 percent from its present 77 percent such that capital expenditure could be raised to 60 percent of the budget from 23 percent.

Is that possible?

Yes, it is possible, but requires strong political will and ability of the leaders to make sacrifices for the development of the nation because it means that they would have to forgo most of their needless benefits and concentrate on the basic benefits. For instance, travelling for international engagements with large contingent using fleets of aircraft, or large convoys on official outings across the country should be stopped to cut costs. There are several overhead costs that could be drastically cut without affecting the running of government. Basically, that is the only way to free up funds for implementation of more capital projects and completion of ongoing ones as scheduled.

Without doing that, there will be problem of ‘abandon-projects’ across the country. Incidentally, 2015 is an election year, which means that a lot of public funds that cannot be accounted for are likely to go down the drain in terms of election funding instead of being spent on execution of capital projects. There is an unseen flow of money that is not serving any useful purpose of real development, both in terms of project and human capital developments in the country.

So, if the federal government is interested in finding quick solution to this challenge, it should go back to perspective planning, design a new development plan and review budget performance with a view to correcting the mistakes in previous budget implementation and strictly following the budgetary and national development blueprints. Government needs to stop sloganeering, labeling and see the reality of what is on ground and what to be done to tackle it.

Even the 2015 budget that is yet to be passed into law, the federal government is waiting to borrow money to implement it; and I am sure most state governments would also borrow to finance theirs. So, the debt overhang arising from this sort of borrowing is likely to be a heavy necklace for Nigerians. Moreover, in response to crude oil price slump, some companies have started laying off workers, including high quality workers even in the oil and gas sector. The industry is already in trouble and this is worsen by poor power supply and lack of access to capital.

The implication is that some companies would downsize by a minimum of 30 percent of workforce, and that would spell doom for the country as it will worsen unemployment. Of course, many families would struggle to feed and take care of their basic needs just as more youths would become restless and susceptible to crime in the society.

What is your take on the recent reduction of PMS pump price from N97 to N87 and its reactivation of N50 per liter kerosene subsidy scheme by the Federal Government?

My view on this is very simple. For the PMS, government is responding to the clamour for reduction in pump price in line with the falling crude oil price in the international market. Many felt there should be a matching reduction on the cost of PMS. Unfortunately, government cannot go below N10 reduction because of the fact that we don’t have enough refining capacity to service our local petroleum consumption demand. The four national refineries are still operating below installed capacity productions. Some are running at 20 percent, others between 30-40 percent installed capacities. That means the country still imports up to 85 percent of PMS for local consumption. And they come in with cost of procurement, shipping or transportation, landing cost among other charges. When you factor in all these costs, you find out that they cannot reduce more than N10 per liter despite crude oil falling below $50 from over $110 at the international market. If our refineries were functioning adequately, then it will be cheaper for us. The average cost of crude oil in 2013 was $109 and $70 for 2014; so far in 2015, it is about $47—$48 per barrel. On why it isn’t falling, it is because we are importing from other nations with added cost of transportation, taxes and other charges.

However, as for kerosene, I believe it was just a unilateral decision because kerosene has been a source of pain for consumers. Nobody could buy it at N5 per litre because of corrupt tendencies in the system. You hardly find petrol stations selling kerosene at N50. The ones you find are selling between N130 and N150 per litre depending on the location. That has not changed much and this latest subsidy scheme won’t change the situation either. This may be just another political gimmick designed to gain political advantage in an election year. It’s a bad situation.

Do you think Federal Government’s efforts to establish more refineries to tackle the fuel importation challenge facing the nation has been successful so far?

The truth remains that federal government has been going to and fro on this issue. It issued licenses for the establishment of private refineries to interested investors more than 12 years ago and none of them have come on stream, or even made tangible progress in building a refinery. Some of us expected the president and his economic management team to have had a lunch or dinner meeting with the proprietors of these firms issued licenses to build refineries and find out from them what is preventing them from proceeding with their projects as planned. If they tell you their problems, then you set up a technical team to resolve them and give them whatever support needed to set up refinery plants in the country. This is important because it will help the economy in many ways. But that has not been done.

What we hear now is that government wants to build new refineries in Lagos, Kogi and Bayelsa. This is coming at a time that government should hands-off refinery business and allow the private sector to operate. You find out that anything business government touches, it never does well. So, instead of engaging in refinery business, why not encourage private investors to come in and give them what is required to succeed. The United States government does not own any refinery; they are all privately owned. Nigeria should tow that line.

But judging from the privatization of the power sector, do you think privatizing Nigeria’s refineries is the best option?

The truth is that the privatization of the PHCN was badly handled. The Atedo Peterside-led technical sub-committee on power privatization was supposed to be sure that the bidders had what it takes to operate and transform the firms they were bidding for. But they did not do that, and that is why they have not taken off properly. After selling the firms, government is giving the private investors soft loans to remain afloat simply because they don’t have enough capital and manpower to turn around the institutions they bought. So, government is now helping them having failed to do its assessment work at the bidding stage properly. I don’t know how they will pay back these loans.

Are you saying that not much transformation has taken place since the private investors took over?

If I am to rate the performance of the private investors operating in the power sector so far, I will score them zero because they have not achieved anything tangible. And that is why they now depend largely on soft loans from government to remain afloat. For instance, the pre-paid metering project, they have no resources to pursue it even though that would help cut loses. The federal government had to order one million pre-paid meters for them and not much progress has been made by these firms in issuing out those meters to customers.

The National Electricity Regulatory Commission (NERC) led by Dr. Sam Amadi has equally failed in its duties as an umpire. The commission gave orders to the electricity distribution firms to issue meters within 40-60 days, that order was not complied with, yet there was no sanction. That shows the commission is not alive to its responsibilities. They brought in CAPMI, a fraudulent policy whereby the discos are encouraged to collect money from customers in advance to install pre-paid meter for them within 40 days and in the end nobody is given any meter and the regulatory institution is not saying anything about that. CAPMI is a matter that requires the attention of the Economic and Financial Crimes Commission (EFCC).

Do you think the size and quality of manpower currently engaged by most electricity distribution firms are capable of delivering improved, qualitative services?

They don’t have the required human capital to drive the process of transformation of the electricity distribution services in the country. That is the problem. The only thing government gained from the privatization of PHCN successor companies was that the money realized from the sale was used to settle the pay-off and other entitlements of the disengaged workers. And what that means is that we are transferring national wealth to a few individuals. So, the privatization of power sector is not working and is now causing a lot of ripple effects on the economy.

It is better government revisits the privatization exercise with a view to correcting the problems now. If possible, do the profit and loss settlement and let them (the private investors) go their way because the private system is not working and they don’t have what it takes to improve the system. Before privatization, Kano Disco was making N3 billion monthly, but after privatization they are not making up to N10 million monthly. And that is because the private investors have not been able to tackle the leakages in the system.

So, until we tackle the metering system, there is no reliable template for billing customers that would work. That is why I said few years ago that they should avoid a situation where people pay for darkness. The current estimated billing is fraudulent. They would just assume that because you occupy two rooms in a building and you have a post-paid meter, they would send you a bill at the end of the month indicating that you have consumed electricity worth N10, 000 and you must go and pay. Such billing is not verifiable as it was not calculated by machine, rather it is arbitrarily fixed by electricity officials. That is why the federal government solely imported one million pre-paid meters for distribution to customers. But the rate of its installation is very lethargic, hence another indication that the private investors are not capable of transforming the sector.

[divider]

About The Author

Related posts

Please wait, while your subscription is progressing...

Subscribe to TheEconomy Newsletters & Notifications

Want to be notified when our article and news are published? Enter your email address and name below to be the first to know.