Should the rich be taxed more?

Ahmed Adamu, PhD

The former Vice President of Nigeria, Alhaji Atiku Abubakar has suggested that the rich should be taxed more as a short-term measure to save Nigeria’s economy from total collapse. Is that the right call? What is causing these continuous recessions in recent years? And what are the way forward?

The frequency and severity of the economic recession in Nigeria are attributed to the failure of the Nigerian government to diversify the economy, cut spending, and apply appropriate tax policies. If the Nigerian economy is diversified, the frequency and depth of the recession would not have been this much. In fact, the real recession in the country is more severe than just the reported recession. Increasing poverty, psychological depression, and insecurity illustrate the deepest recession being experienced in Nigeria.

If a government cannot provide security, there will not be investment and production, and by extension, there will not be diversification. So, the current administration is to blame for the continuous deepest recession in the country.

Atiku is correct, in the period of economic downturn, it is time for a sacrifice to support the collapsing economy. It is wise to tax the rich more because they can conveniently make that sacrifice, and that will set the pace for the Robin Hood Effect. “Robin Hood effect is when the less well-off gain economically at the expense of the better-off.” In fact, taxing the super-rich serves as a payment for the security of their wealth, because, if the economy continues to crash, people will become angrier and might lead to anarchy and destructions.

In the period of anarchy, the rich will not be safe and their wealth will be destroyed. We have seen a spark of such anarchy in recent days. So, paying more tax to save the economy is an investment and protection for their wealth. This will also serve as a redistribution of income, which will help reduce the inequality gaps in the country.

However, before the rich pay more tax, the government must show some level of commitment and credibility. No one will want to pay more tax to a government that spends money on unnecessary things. The rich will not pay extra tax if taxpayers’ money is being used to pay lavish allowances and excess spending by the government officials.

If anyone must pay extra tax, the government must sacrifice first. The government must cut down these excess allowances and spendings to save more. The government must also stop the excessive borrowings and look inward to see what it can save from the cost of governance. That is when the rich and even the poor will be willing to pay extra taxes, because, then we know it will not be wasted. So, it is time for this administration to cut down the cost of governance to save our economy.

This is time to support the lower class, instead of increasing VAT, removing petroleum subsidy, increasing electricity tariff, and introducing new charges on the common man, it is time for social support. Taxing the rich and cutting the cost of governance will enable the government to sufficiently provide social support and spark some economic activities targeting diversification. The government should fix the insecurity at foremost, otherwise, no investment and no production in an insecure nation.

Therefore, Atiku Abubakar’s call for taxing the rich more is one of the best short-term strategies to stabilize the economy. Even though some people will blame this second recession on Covid-19, but the severity and real negative effect of the recession are terrific in Nigeria and the fact that this is not the first one shows the negligence of the government and its poor economic policies.

It is time to heed the advice of patriotic Nigerians, who are passionate about the development of this country, who are willing to always offer suggestions and advice without caring who or which party takes the credit.

Dr. Ahmed Adamu

Nile University of Nigeria, Abuja

ahmadadamu1@gmail.com

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Is it appropriate to benchmark Nigeria's Petrol Price to Saudi Arabia’s Petrol Price?

Ahmed Adamu, PhD

President Buhari, in his speech, compared Nigeria's petrol price to other countries’ petrol prices to justify his recent decision to abruptly inflate the petrol price amid economic and social crises in the country. He argues specifically that “it makes no sense for oil to be cheaper in Nigeria than in Saudi Arabia”.  Now, the question is, how appropriate is it to justify increasing the petrol price just so that Nigerians will buy petrol more expensive than Saudi Arabians?

First, Mr. President was supposed to look inward to see the effect of his decision on his people, especially the poor. Generally, petroleum inflation makes the economy of the poor man worst off. A 10% increase in petroleum prices will at least reduce the purchasing power of a poor man’s economy by 30%, accounting for the direct and multiplier effect of the surge.

The recent 11% increase in petroleum prices in Nigeria has made the economy of the Nigerian poor worst off by 30.30% and without any compensation or cushion. In fact, it came at a difficult time, when millions of Nigerians lost their jobs and businesses weakened due to the recent COVID-19 lockdown.

So, becoming oblivious of the consequences of his decision within the country, and focusing on what other countries are doing, Mr. President is being reckless and ill-advised.  Every country is unique, and Nigeria has unparalleled challenges and difficulties to the extent that we cannot begin to compare ourselves to other countries.

The recent increase in VAT and stamp duty, as well as border closure, climate conditions that threaten agricultural productivity, insecurity, and dollar hikes, have all inflicted pains on Nigerians and weakened their economies. Moreover, the increase in the price of petrol. These bad circumstances did not occur exactly in the countries that Mr. President tried to compare Nigeria with. So, Nigeria’s challenging circumstances are different from the mentioned countries. Since our illness is different, our medicine must be different.

It is not equally justifiable to say Nigerians do not deserve to buy petroleum cheaper than what is obtainable in Saudi Arabia. The only condition that Nigerians should buy petrol more expensive or equal to the price in Saudi Arabia is when the Nigerian government provides equal and affordable access to basic life requirements irrespective of income levels.

Despite the weaker infrastructures, Nigerians are the ones responsible for their access to quality education, healthcare, transport, security, water, nutrition, and energy. This is not the case in Saudi Arabia. So, if a Saudi person conveniently pays N168 per liter, it does not justify that a typical Nigerian can afford it conveniently. Saudi Arabia has a better standard of living, better infrastructure, and adequate access to basic life requirements.

The minimum wage in Saudi Arabia is 10 times more than the Nigerian so-called minimum wage. Even after the Nigerian minimum wage was increased, the government increased the cost of living by removing subsidies and increasing taxes. So, the wage increase added no value to the average worker’s income. In fact, it made it worse because of the wage push inflation.

Looking at the values of currencies, it is not economically justifiable to directly compare prices without adjustment and considering the wealth and welfare of nations. For example, what N162 can buy for you Nigeria is exactly what 1.630 SAR can buy for you in Saudi Arabia. This tells you that Saudi Arabia’s currency is 99 times more valuable than the Nigerian currency.

It means that if you hold a certain currency, you will get 99 times more value in Saudi Arabia than in Nigeria. So, this explains how bad our currency is and how much inflation we have in Nigeria. So, if the value of our currency is 99 times less valuable due to Naira devaluation and inflation, then we are not comparable to Saudi Arabia. Prices should not be raised without increasing the value of the Naira. Nigerians should not be punished for the government's failure to protect the Naira.

Saudi Arabia can sell cheaper due to the strength of their currency and comparative advantage when it comes to petroleum, and they have better wealth and welfare than Nigeria. So, it makes sense for oil to be cheaper in Nigeria than in Saudi Arabia, because we have a lower level of wealth and welfare.

The increase in petroleum price in Nigeria has a greater inflation multiplier than in Saudi Arabia, as such oil should be cheaper in Nigeria to save further costlier inflation.

The only justification Mr. President could give for his second-time petroleum subsidy removal was just to liberalize the market. However, the timing and process of going about that are critical. It is not recommended to liberalize the market yet, looking at the difficult time we found ourselves: increasing inflation, health crisis, insecurity, zero refining capacity, etc.

Certain conditions must be fulfilled before removing the petroleum subsidy in a country like Nigeria. If necessary, the removal must be in gradual phases. Alternative subsidies like targeted or quota subsidy regimes could be considered.

Mr. President should by now be advised to begin taking responsibility for his actions and shun blaming the past seeking an excuse. Criticism is good, without it there would not be focus and improvement. So, our leaders must be willing to listen and reflect on the criticisms labeled against them and be willing to change their decisions upon new realization and exposure to the truth. Finally, I hope Mr. President and at the same time, the Petroleum Minister will revert to N145 per liter to enable the economy to bounce back at least in the short run.

Ahmed Adamu, Ph.D., Senior Lecturer, and Petroleum Economics, Nile University of Nigeria, Abuja. ahmadadamu1@gmail.com

 

The Transformation Nigeria Needs

Ahmed Adamu, PhD

13 minutes read.

Hitting the snake-tail would not stop it from biting. The compounding economic and social challenges keep on biting Nigerians, and we have not yet identified the roots of these issues. Untold poverty, growing inequality, acute hardships, and alarming insecurity and deprivations have been threatening the fundamental human rights of living freely and safely in Nigeria. We are already on the verge of anarchy, and it seems too little too late to do something about it, but there is a window opportunity to hit the snake on the head. I will show you how.

When the right-minded young people struggle so hard to earn a living but get nothing in return, frustration and desperation are being bred. When you have a society where passion and hard work do not pay, you will face despondency. When people realize that hard work does not work, they will switch to easy and bad ways. When money rules and when scarce resources are subjected to steep competition due to overgrowing population, desperation and insecurity proliferate.

  

I recently traveled for a friend’s wedding, and along the way I saw some eagerly young hawkers, selling petty things ranging from bottled water, groundnut to bread. Daily, these young folks are scorched by the sun and beaten by the rain, yet they endure. I noticed how some of them were distracted and lost into the admiration of the luxury and exotic cars that pass them by. They wish and imagine themselves living that conspicuously comfort life. This temptation makes them anxious, and on top of that their unpaid hard work makes them frustrated. When you have anxiety and frustration, you will have desperation.

Once people are desperate, they do desperate things. Would you wonder if some unscrupulous individuals approach some of these desperate young people and present them with a bad opportunity to earn some money and they accepted it? Of course, you will not. Some of them may willingly do anything as long as they will get money to live those comfortable lives they admire. Because every comfort is a function of money.

When people are exposed to persistent hardships, their mental reasoning abilities fade away, and they lose their self-value. When people live a miserable life continuously, they lose hope and give up, and this makes them not even value their own lives talk less of other people’s lives. They will feel it is better for them to leave the world anyhow than to continuously be living that woeful life.

The biggest source of these kinds of frustration and desperation are from young people who are not educated and not doing anything to earn a living. These are the dangerous and quickest source of these bad desperation, and they are the roots of all these ills. Young people that fall into this category are growing rapidly. That is why insecurity keeps growing by the day. Even yesterday one of our neighbors was kidnapped right across our estate inside Abuja, I overheard the gunshots.

The middle-class population is also facing their own frustration due to the growing responsibilities, expensive living, and dwindling income. The upper-class population is also desperate to maintain their status and protect their children from falling into those hardships. So, everyone is desperate, and this makes people willing to do anything to get the money.

Money has become the ultimate goal in Nigeria, who becomes what and who gets what is influenced by money. If you want your child to get a quality education, that depends on how much is your income. If you want to get quality healthcare, potable water, security, a means of transportation, or mortgage, that depends on your income. If you have money, you get everything, and if you do not have the money you get nothing. Even your survival is dependent on your money.

If what you get and your access to basic living standards are absolutely dependent on your money, then the money rules and everyone will do anything to get the money since everyone is their own government, they have to provide almost everything for themselves.

Insecurity, corruption, and all other vices proliferate because of too much pressure on the money. We can fix insecurity and corruption only by destroying the current system where everything is centered around money.

If there is no system that will enable people to have equal access to basic healthcare, quality education, nutrition, housing, and security irrespective of their income level, then there will never be security. The biggest and most important transformation Nigeria can achieve is by creating a system that can provide equal access to the basic life requirements without consideration of income levels of the people. There should be a system where what you get and what is accessible to you is dependent on how much you want it and how much you work for it only.

There must be a visionary transformation in health, education, transportation, security, food, and housing sectors, which will set a minimal provision for every Nigerian irrespective of their income levels. People do not have to resort to crowdsourcing of funds to pay for the hospital bill, people should not have to remove their children from the best schools just because they cannot pay for the fees, students should not drop out because they cannot pay the tuition, your life should not be threatened just because you cannot pay for your personal security, etc.

Amid scarce resources and a rapidly growing population, how can we achieve that? It is impossible to serve everyone when our resources and provisions are not enough. The population of Nigeria is so big that we need to spend extremely much to provide all the above-mentioned basic life requirements to everyone irrespective of their income levels.

Therefore, to achieve that, we must embark on population management. What is population management? It is the process of providing before adding population. Before we add 1 million population, we must first provide the resources that will give them those basic accesses. If our resources are enough to cater for an additional 10 million population, then we can grow by that exact amount, if it is not, we should not. So, population growth should be determined by the available resources.

For example, if currently, we have 10 million spaces in our primary schools and 15 million children are born today, this means that in the next six years we must add 5 million more spaces in primary schools. And that’s how we keep tracking and providing to accommodate this expansion in every sector. If we do not have the resources and we are not planning to get the resources to provide for the additional population, then we should not welcome them.

So, the government must look into the future and see what it can provide and the resources available to it, that is what determines the targeted population expansion. Our resources should determine our expansion. The government should then set a targeted population expansion for each period, and that target should be apportioned according to income classes and locations. We cannot afford to add population that we cannot take care of, because that is what adds to the desperation and put more pressure on the limited resources, thereby reducing its quality and adequacy, and causing insecurity.

For example, if your neighborhood hospital is designed for 1000 people and your community added 1000 more people, it means you need an extra hospital. If you could foresee that population growth and built the hospital ahead, then you are managing your population. Population management may not strictly means limiting the population, it suggests that you only grow based on your capacity. If your capacity is enough to cater for the population growth, you can then grow, but if your capacity is limited, you should limit the population growth.

Another element of population management is tracing the economic and well-being status of every member of the population to assess the development of their economies. With the right population management, those vulnerable young folks that are hawking on the street could be traced and supported and rescued from that danger. With the right population management, there will not be unnecessary competition and pressure on limited resources, and there will be stability and security.

All these transformations are possible only if we can change our belief about our ability as a people, if we keep thinking that these things are not possible in Nigeria, then we will never make it. In my subsequent articles, I will outline the details on how to go about these policies and how to achieve these equal accesses in every sector irrespective of income levels. 

There is nothing we cannot achieve with the right vision, belief, tenacity, and right leaders. Real transformation is possible. But we must be willing to sacrifice today for tomorrow, we may not live to see the benefit of these transformations, but we owe a debt to the future generation.

We must come together and stop looking at our problems as regional or ethnic problems but as Nigerian problems. If a southerner is killed, it should matter to every Nigerian, and it should not be a southern problem, it should be a Nigerian problem. We must stop regionalizing or ethnicizing our problems, all problems are Nigerian problems. We have to set the fundamental values first and embark on fundamental transformations to hit the snake on the head.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

Why Nigeria can still produce oil despite making a loss for each barrel produced

Ahmed Adamu, PhD

It costs Nigeria $15 and $30 to produce one barrel of oil in onshore and offshore (deep water) production sites respectively. If the oil is sold below any of these levels, does that mean the respective production site will go out of business? The answer is no. Even if the oil price is below the production cost, you will still produce, despite the loss. 

For example, as I write this article Nigerian Bonny Light oil is selling at $18.70 per barrel, which means the offshore production will be making a loss of $11 per barrel, and the onshore sites will be making a $3.70 margin per barrel. Though 55% of the Nigerian oil production fields are onshore, the expensive offshore fields produce more quantity per well. However, for offshore production to be profitable, oil prices must be high above $30. This means that for more than a month now, the Nigerian offshore production has not been profitable, but we still have to keep producing anyway. 

Except for a few days last month, the oil price has not been below the onshore production cost. The lowest Nigerian oil was sold during this coronavirus crisis was approximately $15 per barrel. The question is why Nigeria would produce oil despite the loss. 

In oil production, the exploration and development costs are the fixed costs, while the cost of production or oil lifting is the variable cost. The cost of a barrel is the average of the fixed and variable costs. So, even if the price is less than the total cost of the barrel, production can go ahead, because the oil industry is capital intensive and has a low variable cost. So, the bygone rules suggest that production can continue as long as the price is paying back the variable cost i.e. the lifting cost. The expensive fixed costs are assumed to be recovered later when prices become higher.

The variable or lifting cost of the Nigerian barrel of oil is $3.5 and $5 for onshore and offshore respectively as reported by NAPIMS. So, the rule is that, as long as the oil price is above $5 per barrel, Nigeria can produce irrespective of the loss relative to the total costs. Nigeria will go out of business if the barrel of oil sells below $3. It is best to shut down production at this low oil price ($3) if it can be reopened. The onshore oil wells are more flexible, they can be shut down and reopened quickly depending on the market, unlike the offshore wells that are not so flexible. 

Nigeria having one of the best oils in the world and having quick access to seaports may not face that appalling low oil price. The good news is that, as the world is gradually reopening from this week, the oil price is likely to go high, and I will predict, the oil price will surpass the $30 Nigerian benchmark. So, the oil will still be the savior of the Nigerian economy because no other sector of the Nigerian economy is contributing even just 5% of the export revenue. With the acute recession underway, the fiscal receipts will be low too.

Even after the coronavirus, the oil will continue to dominate the global energy mix for some years due to its suitability and versatility. The biggest threat to oil is the evolution of the electric transportation system. More than 60% of the oil demand is for transportation purposes, and if you replace that with more environmentally friendly transportation options, the oil prices will likely peak at $15 per barrel. This will then make countries like Nigeria to suffer huge economic costs, like weaker Naira, inflation, low GDP, a possible recession, etc. and leading to shut down of many oi production sites. 

It is very easy to sit back and produce oil as far low as $5 per barrel in the short run, but in the long run, it is a trap and disaster. So, there should be a strategy for the next energy shift. We can either produce electric transport systems or produce batteries or at least produce more electricity for sufficient domestic demand and export purposes. Electricity will then be the next oil, and we should plan to export it too. The question is, with which fuel are we going to generate the electricity? The wind? Solar? Hydro? Gas? Or Coal?

Among fossil fuels, only Natural gas seems to be favorable due to its thermal efficiency and relative cleanness. The good news is that Nigeria has the largest gas reserves in Africa. Very soon, gas prices will get uncoupled from the oil price, and it will become the next major fuel, I reckon. 

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

First-Ever Negative oil price: Why

By Ahmed Adamu, PhD

(20th April 2020, 23:00)

As I write this article, the famous American crude oil called West Texas Intermediate (WTI) is sold at -$13 per barrel, which means, suppliers of oil have to give $13 to whoever is willing to take one of their barrels of oil produced. This means, the oil is free today, and you will get an incentive for taking the oil.  The suppliers are desperate to let go of the oil they produce to avoid storage costs.

The reason behind this unprecedented decline in the price of that oil is just simply a storage crisis. The buyers of WTI oil are required to take physical delivery of their oil at a location called Cushing in Oklahoma, unfortunately, this location has saturated its storage capacity, and buyers don’t want to take delivery of oil without a place to store it before getting a final buyer. And tomorrow, Tuesday is the expiration of the May Futures contracts.

A futures contract is an agreement where buyers and sellers agree to deliver oil at a futuristic price. Buyers and sellers establish a price that oil will trade at not today, but on some coming date at a particular speculated price.  So, the futures market for the oil that’s supposed to be delivered in May is closing tomorrow.  So buyers don’t want to take delivery of May supplies because there is no space to store them. That’s why they are ditching their contracts, and no one is willing to keep their contract, hence the negative price. 

However, this is only affecting American oil, not Nigerian oil, Nigerian oil as we speak now is sold at $22 per barrel, it is even high by 4% today. Other oils like that of global benchmark oil, the Brent, are not facing that pressure too. It is sold at $26 per barrel. 

Most people would have expected an increase in oil price, but the oil price is still not above the Nigerian adjusted benchmark of $30 per barrel. This is because the world is already having a lot of oil supplied, more than it needs and the demand is nowhere to be found due to the coronavirus lockdown. 

Despite the recent OPEC’s commitment to reduce world oil production by 10%, the oil price is dwindling, this is because we already have excess inventory, and we have to allow time for the market to clear before this reduction takes effects. In the normal demand period, this takes one to two months, but in this abnormal period, the market response may take up to four months, things being the same. So, the only immediate hope is for demand to surge when countries agree to open their economies in the presence of the deadly virus.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

How to Open Nigerian Economy in the Presence of Coronavirus

Ahmed Adamu, PhD

We do not have to wait until the end of coronavirus before we open our economy, if there is one thing coronavirus is leading us to is a new way of life, not the end of life. Now, it is time to design a new lifestyle and open the economy despite the presence of the virus, here is why and how.

Closing a weak economy can lead to its ultimate death. The lockdown due to the coronavirus is tantamount to the absolute death of African economies that are largely comprised of small and informal enterprises. The economic repercussion of the lockdowns could be costlier than the virus itself. Locking down the economy will mean loss of income, jobs, and productivity, leading to extreme poverty, unemployment, and inflation. These economic issues can cause anarchy that might cost more lives and resources. The challenge is, how do we save these lives and resources in the presence of the deadly coronavirus.

We have started experiencing increasing desperation, hunger, insecurity, and poverty in just a few weeks of the lockdown, now ask yourself, what will happen if you lock down a hungry and idle person for a longer time? First, as they say, a hungry man is an angry and desperate man, and an Idle mind is a devil workshop. So, when these negativities come together, we should expect the worst. The good news is that the social and economic costs of the lockdowns are avoidable.

If we are to wait until the virus is gone before we open our economy, then we will not even have the economy to open. In fact, even if we have the remains of the economy, we will need to spend so much money to revive it, do we have the money for that? I guess no. The daily losses of these lockdowns, both human and financial are far more than that of the virus. That is why I recommend that these lockdowns should not last a month.

It is okay at the beginning of a pandemic like this one to lock down countries and states to buy time to study, prepare, plan, and adapt to the virus. So, one month should be enough for that. Any lockdown beyond one month will harm the economy beyond our ability to repair. That is why I recommend opening the Nigerian economy as soon as possible based on the following conditions and recommendations.

Similarly, it is not advisable to lock down cities with some weekly opening days, the threat is that even a one-hour window can cause widespread of the virus if the following measures are not taken. If the right measures are taken, then we can open the economy not only on those window days but completely. So, the following codes of living can guarantee the opening of the economy despite the presence of the virus.

1. Testing: we should provide adequate testing booths across the country, just the same way we have election polling units, we should have testing units, and people should be scheduled for testing so that everyone in a ward can rapidly get tested within 30 days. People must observe the required distance and wear face masks while in the queue. Everyone that gets tested, must collect the certificate of clearance, with which they can report back to work or open their businesses. Organizations or companies that are eager to bring back their workers to work can set up their testing booths for their staff. The idea is not to risk allowing carriers of the virus to report back to work and infect others. Housing Estates can also organize their testing booths. Anyone that tested positive should not be allowed to go back to work or business. The clearance certificate must contain an authentication barcode so that law enforcement officers can ascertain the validity of the certificate at any time.

2. Contacts Tracing: As we open the economy, everyone must minimize the number of people they meet every day, whoever you are meeting must be very urgent and important, otherwise, do most of your conversations and transactions online or over the phone. Minimize contacts to the lowest possible level. Everyone must have a book or diary in which they document names of all the people they meet daily, including their contacts, meeting location, date, and time. This will make the contact tracing easier. In case, a person tested positive, it is easier to trace his previous contacts, so that they can also be informed and forced to immediately isolate.

3. Social Distancing: As I mentioned above, after opening the economy, we must minimize contacts, and create the required physical distance when meeting someone, this does not matter if it is our friend or a family member. The social distance must be observed while undergoing normal activities. What about in a taxi or bus? In this scenario, everyone going into public transport must sanitize their hands, minimize talking and contact if possible, wear face masks, and do not touch their faces until they wash their hands. Recreational centers must enforce similar measures and social distancing, and crosscheck clearance certificates as well. Mosques and churches can also be opened, but members must have clearance certificates, observe the distancing, wear masks, wash their hands and bring their prayer mats in the case of the mosque. The prayers can be observed in many batches. Those that may not have space in the first batch can wait for the second batch or pray at home. Weddings can take place using similar measures.

4. Enforcement: There should be a law that will incriminate any negligence or failure to observe the safety measures by business owners, employers, religious leaders, and even individuals. If anyone is found not observing the codes should be taken to court for fines or imprisonment. The new job for Police and Civil Defence will now be to ensure compliance with these measures. Security agents must patrol every location to enforce compliance. There must be checking points everywhere to ascertain everyone’s clearance certificates and observance of the guidelines.

5. Distance Business and Learning: Businesses should be incentivized to take their operations online. The majority of transactions and education must be online unless it is economically and technologically impossible. The government through NITDA and SMEDAN must budget some money to help small and medium enterprises go digital. Restaurants must serve only takeaway or home delivery. There must be additional guidelines for the physical decongestion of businesses and education. Schools that can operate online must continue online, and their examinations should be online too. Teachers must learn to ask analytical or practical questions for fair assessments of true understanding, which is a rewarding skill for this century. Radio stations are good mediums for learning for those that cannot afford the internet. Primary and Nursery schools may be opened but with strict measures and observing all other codes as well.

6. Protections and Cure: there must be sensitizations on the need for everyone to protect themselves and all the protection facilities should be provided for free by the government, this should include hand sanitizers, temperature tester, and face masks. Local manufacturers should be asked to supply these things in order to create jobs for them. Generally, people should avoid contacts, crowd and touching their faces before washing their hands. For the cure, we must not give up, we should not wait for others to give us the cure, we should set up a special task force responsible for exploring all possible cure and procedure for the treatment of the virus. This should include unconventional medicine like traditional and herbal medicine. There should be a national conference where all conventional and unconventional medical practitioners would be welcomed to present their procedures or medicines for the cure of this virus. So, we should do our very best to find the cure ourselves.

7. Organizational Response: Each organization or institution or business must establish their own special unit responsible for responding to the COVID19 and setting their own preventive and protective measures for their staff and customers.

8. Investment: The money that is being shared to keep people at home should then be used to support businesses implement these measures and to revive the dead businesses. This can serve as an opportunity for a big positive shift in our economy.

So, every state should constitute a committee responsible for designing the roadmap for reopening their economies and set up guidelines suitable for their own realities and set a target date for the reopening. The above guidelines provide the starting points and ideas on how to go about it. This is urgent, because, every day we spend under these lockdowns, we incur irreplaceable costs. Let us stop these avoidable costs.

Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
ahmadadamu1@gmail.com

The Coronavirus Lockdowns: We must think twice

I remember the Labourers, Shoe Shiners, Bus and Taxi Drivers, Okada people, Keke drivers, car-washers, Mechanics, Laundry people, Wheelbarrow Pushers, Printers, Shop owners, Tailors, Airliners and many more micro, small, medium and big enterprises whose businesses and sources of income are shut down because of the Coronavirus lockdown. Some of them can never go back to their businesses, because some of the businesses are dead by now, they must have consumed all their profit and capital. The questions are, how can they survive this lockdown any longer, and in the aftermath of the pandemic, how can they start over?

We have seen an acute rise in desperation, poverty, insecurity, and unrest in just a few weeks of this lockdown.  Hunger can make people do desperate things. Hunger is threatening people's lives more than the coronavirus does. We have reached a stage where people are willing to face the virus just to feed themselves, or engage in stealing or robbery to get food. There is this wise saying that, "whatever removes rat from its hole into a fire is more dangerous than the fire." Hunger is more dangerous than the coronavirus. With the imminent lockdowns in some states, one must be cautioned about the social and economic consequences of that. 

The differences in our economic classes have never been this wide and evident as it is during this lockdown, and the vicious cycle is coming down on the common man. Poverty is affecting the common man, and at the same time, he is the victim of the resultant insecurity, because the bourgeoisies are well protected. There is no way we can afford to lock down our economy much longer, we recently withdrew N5 billion from our sovereign wealth fund and another N3 trillion loan is on the horizon, and nothing has significantly changed so far, this is not viable and promising for our future. We have to think outside the box. 

The question is, can Nigeria fit in and survive a lockdown like this one? The larger portion of our population is made up of people whose income is dependent on daily outing and hustle. If the advanced countries can do it, can we? People that have saved enough money can afford the lockdown comfortably, but what about those that didn't save money?

Help me mention more businesses that are affected by this lockdown, let us recognize their plight and the extent of this crisis. 

I would suggest opening up the economy, but with serious measures of prevention, sanitization, distancing, and testing. 

 Dr. Ahmed Adamu, 

 ahmadadamu1@gmail.com

The Economic Trap of Coronavirus

Ahmed Adamu, PhD

 

It is a difficult call for any government to shut down its economy, but that’s what’s happening today due to the coronavirus. Here is the trap, the public quarantine due to the virus has led to the loss of jobs and incomes, inflation, and recession, yet governments have to finance the quarantine in form of social palliatives, yet again, governments have to fund the containment, stoppage, and cure of the virus, and again governments have to finance the revival of the hibernated economy. All of these in the presence of the worst oil revenue slumps in two decades, and a period when every country is struggling to survive, and external aids are not imminent. 

The longer the pandemic stays, the more expensive the recovery will be.  So, the government would need to spend more now to cut the waiting period, because every minute comes with a steeper recovery cost. This crisis is unique and by far different from the 2008 economic crisis. Now let’s analyze these questions, can the Nigerian government bear these costs and what’s the Nigerian best bet? How to manage the coronavirus economic crisis and how different the current economic crisis is from the 2008 global recession?

More than half of the total jobs in Nigeria is being lost, people lose their jobs without social protection and are being asked to stay at home. Income losses are estimated to amount to at least N3 Trillion in Nigeria alone in just a matter of a few months. Investment is rapidly going down. Factories have shut down, even factories that insist on production in this period could not operate as their workers decided to stay at home for their safety despite the bonus offered to them, and this led to scarcity and hence Inflation. 

The economic paralyses are spreading even faster than the pandemic. The effects of these and many other economic paralyses caused by the novel coronavirus will leave a scar and reverberate around economies even in the aftermath of the pandemic. 

The gap is getting wider, it requires refill by the day. The financial contributions made so far in Nigeria by public and private individuals and organizations to fight the coronavirus, which amounted to over N30 billion, is an opportunity to start somewhere, at least, to contain the disease, fund development of the testing kits and maybe fund researches for the development of its cure. This is a period where external intervention may be limited because every country is concerned about their health and economic uncertainties.

How to manage the economic crisis caused by the coronavirus is by far different by how we managed the world economic recession back in 2008. The 2008 global recession was a normal economic cycle that happens at least once in a generation and it was seen coming. It was more of the effect of human errors and decisions, and it was caused by variables within the economy. During the 2008 recession, the economy was not shut down, it was active. So, the aftermath bailout and other injections were smooth, and the time lag was not that long.

In contrast, the recession caused by the coronavirus is external to the economy, unexpected, very fast and more severe. It also put the economies on hold, and at the same time spending a lot to keep it on hold. The money that could be used to revive the economy has to be spent to fund the management of the pandemic and for social protections during the economic hold on. The loss of jobs in the current crisis is 10 times more than the 2008 economic crisis. Similarly, in the 2008 crisis, the oil price did not plummet to as far low as below $20 per barrel as it is now, the lowest it reached then was $32 per barrel, so, there were some reasonable revenues to fund that recovery. The current crisis came with two punches, a sharp increase in demand for government spending and a deep decline in government revenue. So, when we eventually come out of this pandemic, are we going to have the energy to go for another war, the economic war?

The effects of these shutdowns and lockdowns will echo after the pandemic and might cause some social and economic unrest, which require redress too. So, the government needs to spend more money this time around to recover the economy as an economic stimulus. Other countries would be focused on reviving their economy too, every country will be on their own. According to the United Nations, developing countries would need a $2.5 trillion COVID-19 rescue package to revive their economies. For Nigeria, at least a $100 billion rescue is required. 

Our best bet in Nigeria is to do our best to stop the spread because the more it spreads, the longer it lasts, and the more we expose ourselves to graver dangers ahead. So, it is cheaper for us to do everything possible to end the pandemic in just a month, let us target the end of April. However, with the increasing rate of new cases, it is not encouraging. 

Everyone has to take this pandemic as a personal economic threat because it is a trap, we all fall in. Think about Taxi and bus drivers, restaurants, hotels, barbers, airlines, social and sporting centers, and other informal and semi-formal businesses in this period, it is a catastrophe. Our individual and collective economies are severely affected by the day, and if it continues there will be chaos, a bigger catastrophe. Closing down the economy longer might lead to even bigger problems. The Swedish relaxed approach can be considered in Nigeria as soon as possible.

I would like to commend the efforts of health authorities for their efforts so far, and I want to implore them to make judicious use of the resources contributed. In this case, it must not be the Nigerian way, because it is a matter of life and death. The President needs to be more proactive and work closely with the task force to supervise the operation and receive minute by minute updates. The visibility is not necessary, but in the period of crisis and uncertainty, people need to be seeing and hearing from their leaders for more partnerships, hopes, and psychological stability. We are in a war, a health and economic war, our commanders-in-chief need to be more proactive in the period of war. 

 

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

Convert National Assembly Building into a World-class National Hospital

Convert National Assembly building into a Worldclass National Hospital. It will be more timely and economical, and can be used in the aftermath of the Covid19 pandemic. With the broken economy, Nigeria cannot afford to fund building a world-class Hospital from scratch. The N37bn can be used to facilitate the conversion and procurement of equipment.

This can be the swiftest strategy to respond to the health crisis in the country and to reduce the importation of healthcare services. Now that healthcare exports are restricted by foreign countries. In case, National Assembly members want a new space, they can then take over the current National Hospital building or at least share the Villa with the President.

Nigeria would have to spend more in the aftermath of the #Covid19 to bail out businesses and protect jobs, there will not be enough money to adequately upgrade the health sector. Radical changes like this can be smooth in tough situations like this one.

Ahmed Adamu, PhD
Petroleum Economist, Nile University, Abuja
ahmadadamu1@gmail.com

  

How the Oil Price War amidst Corona-Virus Pandemic hits the Nigerian Economy

Ahmed Adamu, PhD

Nigeria’s major source of export revenue is oil, and now over 50 Nigerian oil cargos were reported to have been stranded in oceans without buyers, the question then is where is the revenue going to come from? On Estimate, Nigeria loses at least N25 billion on a daily basis, if continuous up to a year, it will lose almost N1 trillion in a year, courtesy of the current oil price shocks. I explained the dual causes of the current oil price shock in my previous article. Therefore, the Nigerian government cannot fund its expenditure as planned in its ambitious budget. It means that some contracts will not be awarded, people will lose jobs, income and spending will reduce, and the economy may slide back into a recession.

Due to low economic activities, the government is losing some internally generated revenues and must have started suspending some major capital projects. Some private companies have already started sacking their staff, which increases the rate of unemployment. Though the government said, it will not sack any of its workers, but will not employ anyone, it has placed an embargo on all government recruitments, which means more people will remain unemployed. Now with people being lockdown and schools, businesses, transport services, and factories close down, the GDP will plunge drastically. The aggregate demand and supply will converge at a farther distance away from the potential GDP, which increases the recessionary gap.

All the compositions of GDP are going down, including consumer spending, investment, government expenditure, and net exports. This indicates a looming recession. History has shown that there is a positive relationship between Nigeria’s GDP and Oil Price. I studied this relationship way back from 1974 and I observed that any reduction in oil price is associated with a very low or even negative GDP growth. So, the current situation will not be exceptional.

With limited or restricted importations, some goods and services will be scarce, because the countries that export them have shut down too. This can lead to a price surge or inflation. At a time when the oil price is low, import bills are supposed to be cheaper and lead to low inflation, but in Nigeria is not the case. Despite the cheapness of the goods and services in our import basket, the price of the foreign currency is becoming high, leading to inflation.

For example, the dollar is appreciating due to its limited supply or scarcity, courtesy of the low oil revenue, which is the major source of dollar for Nigeria. We have already started seeing a situation where banks cannot meet foreign currency requests by their own customers. Amidst this, there were some panic demand for the foreign currency for speculative and precautionary purposes, and that has contributed to the increase in the value of the dollar in Nigeria. So, we now have dollar-push inflation in Nigeria. As of February 2020, Nigeria’s inflation stood at 12.20%, the highest in more than a year.

Now, it is obvious that the Nigerian economy is severely hit by the current oil price war between Saudi Arabia and Russia. This is quite avoidable. Corona Virus would have hit the Nigerian economy, but not this much. Saudi Arabia’s decision to go into the price war is what makes the case even worst. Corona Virus would have kept the oil price around $40-$45 per barrel. It would not have been this worst, $26 per barrel. One of my students asked me, can we beg Saudi Arabia to stop this war? we are being hit by their fight. As the saying goes, when two elephants fight, it is the grass that suffers. Nigeria is the grass here.

Russia refused to back off and still willing to fight the war as far low as $11 per barrel, and Saudi Arabia is still not willing to show mercy too. Russia will make sure that America’s high-cost shale petroleum production is no longer profitable at low oil prices, and Saudi Arabia will fight against that so that even if America is to be displaced, it must come with a cost for all. It has already cost Russia over $40 Billion so far. Saudi Arabia is directly hitting Russia, by supplying more oil at a discounted value, and not minding the OPEC+ production quota, and by so doing hitting other people’s economies.

This price war came at a very wrong time, and it has added salt to the injury. However, I am optimistic that the price will bounce back. Soon, one of the parties will give up or agree to come back to a table for new negotiations. Another possibility is that some high-cost oil producers will be squeezed out of the market, Nigeria could be one of them, but imagine what cost will that come with.

The Nigerian Oil Company is also considering flooding the market to raise its revenue, but that will be unwise because it is like shooting yourself on the leg. The second option the Nigerian oil company is considering is to reduce the cost of oil production in Nigeria, but this takes time and it is difficult because NNPC may not be in a position to significantly dictate the cost of production, since up to 90% of the oil produced in the country is produced by international oil companies.

So, this is a tough time, and this is exactly what we have been afraid of. I cannot think of a short-term initiative for now, but of course, everyone knows that we have learned that we must have sufficient refineries and other industrial production capacities to reduce our import dependency, and hence our vulnerability. This can be achieved through strategic product import elimination, where we target the elimination of certain products out of the import basket through the provision of sufficient local production capacities for such products or services.

Our exports earnings must come at least from Agriculture, Service, and Industrial Sectors, at least each contributing 20% to our export earnings. It is surprising how oil is contributing 90% of Nigeria’s export revenue and at the same time contributing only 10% to its GDP, this shows the gap in Nigeria’s refining and industrial capacities.

Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
ahmadadamu1@gmail.com

Corona-Oil Crisis: The Nigerian Fate

Ahmed Adamu, PhD

The outbreak of the Coronavirus caused a reduction in the global demand for oil, resulting from a slowdown in the production and shutdown of factories and airports for safety and preventive purposes. The resultant reduction in demand for fuel and energy inputs led the oil price to plunge to as at today’s Brent Value of $35 per barrel of crude oil. This is a $22 deficit per barrel compared to Nigerian anticipated oil price in the 2020 fiscal plan. This means a reduction in the fiscal performance of the country amidst the social and economic crisis.

The situation exposes Nigeria’s economic vulnerability to oil shocks, and now that Nigeria’s savior, OPEC, is losing its market influence. In the past, even individual OPEC countries could easily influence the market. OPEC played an influential role in dictating the global economy through its production quota system in the past. Now, the era of OPEC's influence is shrinking, and Nigeria may not be protected by OPEC.

The continuous domination of Non-OPEC countries in the global oil supply and the emergence of new unconventional reserves has left OPEC stranded and powerless. As of last week, OPEC could not cut supply enough to influence the price without contribution from Russia and the USA. For OPEC to raise oil prices up, it needs cuts from other non-OPEC countries. Otherwise, they (OPEC) will lose market share and lose revenue if they are to go for the solo cut. To achieve the OPEC’s market target, other non-OPEC countries must cut production by minimal 500,000 barrels per day for a period of 3 months.

The unanticipated coronavirus outbreak led to the flooding of the oil market with excess supply, no one planned for any fall in demand and oil was already produced enough to meet the normal demand, but now due to this emergency, the fall in demand has caused excess supply. As a result of these excesses, even if there are production cuts, it will take up to two months for the market to respond. This adds to the odds for countries like Nigeria.

Russia refused to agree to any cut, and this undermines the OPEC effort to raise the price. And if Saudi Arabia is to punish the Non-OPEC countries through a price cut and increased production, the situation will get worst for some OPEC countries like Nigeria. Saudi Arabia can produce more and sell its oil at a cheaper value in order to displace Russia and the USA in the supply schedule, making them (the Non-OPEC countries) lose market share, and without buyers, they have to cut production. This is exactly what Saudi Arabia is doing at the moment, because lowering the oil price below the USA and Russian marginal cost of oil will make their production unprofitable, and therefore have to shut down production.

Though this is a reactive measure and it is already plunging the oil price further down in the short term, evident by the sharp price drops since from last week, and anytime Saudi Arabia decides to sell at a higher price, the Non-OPECs will take over again, and this cycle continues and thereby sticking the price at a low level. This means Nigeria would have to device other means to sustain its foreign earnings, as oil revenue is no longer reliable.

The idea of borrowing to fund Nigeria's increasing fiscal deficit should not be welcomed, Nigeria should not be sinking into the debt trap, otherwise, any possible future oil gains will go down the drain and the Nigerian prospect will go dim. With the future of oil becoming more uncertain, there is a possibility that Nigeria will not be able to service its debt and may fall into sovereign default. Now is the time to look into the future and save it. 

There should be an alignment in Nigeria's fiscal measures, borrowing to fund ambitious and unnecessary government liabilities is not wise. Increasing the minimum wage and increasing VAT reduces the value of the additional income while adding more weight to the government. Limiting land border importation will not stimulate the economy without the prerequisite conditions for such natural stimulation. Costing the economy without its attendant benefits is a huge leakage. The economy can grow without being constrained. The Nigerian economy needs allowance and incentives to boost activities so as to prepare for the next global economic and energy shift. 

The increasing volatility of oil price and its sharp sensitivity to socio-economic issues is already speeding up the evolution and development of oil alternatives. This makes the world preparing for a new energy era, moving away from oil. The question is who is the next king after oil? Who is going to be the leading country in terms of this transition? Is Nigeria going to be a leader of this new transition or a follower? Without oil, would Nigeria have any comparative advantage on future fuels? To lead, these questions must be answered, otherwise, the fate of Nigeria is uncertain.

Potentially, if China, India, Japan, Russia, and the USA would together shift in one direction, the rest of the world will follow. But the unity and reliability of the transition are still in question. There is still room for Nigeria to make it right. Despite the current decline of oil prices, there is hope for demand and supply convergence at higher oil prices. With prices going down further, some countries cannot profitably produce, and cutting out the higher marginal cost producers in the schedule will raise the price up. However, no high oil price will prolong nowadays, so, this decline will be temporary. So, the time to take drastic shift is now, this is the last call for Nigeria. The best thing is to lead in the new energy transition.

Because of the global appeal and convenience of oil, the new transition could be delayed, but it will definitely come, and it is possible one of the fossil fuels will take the lead, especially the Gas. So, Nigeria should build enough gas infrastructure to save itself from a catastrophic shock that awaits it if oil prices continue slumping.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com