Monday, 30 March 2020

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
  

Sunday, 22 March 2020

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


Saturday, 14 March 2020

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