Analysts urge diversification of economy, say current situation not sustainable

Adeola Oredola

With the rising price of crude oil in the international market which stands at about $75 per barrel and the Nigerian Government’s benchmark of crude oil at $57 per barrel for the 2022/2023 Medium Term Expenditure Framework (MTEF), analysts have warned Nigerians not to expect much gains from the price increase, urging the Federal Government to focus more on diversifying the economy from crude oil.

In a chat with EnergyDay Nigeria, Dr. Muda Yusuf, Director General, Lagos Chamber of Commerce and Industry (LCCI), disclosed that rising crude oil price is a double-edged sword.

He said the development is good for oil revenue, forex earnings, foreign reserves, forex market liquidity, and possibly the Naira exchange rate, but noted that there could be new pressures on domestic energy prices, especially costs of diesel, aviation fuel, kerosene and LPFO.

This, he said, would put pressure on production costs with implications for domestic prices and inflationary pressures. Profit margins will be eroded.

He stated, “We would see a resurgence of fuel subsidies and associated fiscal leakages. Smuggling of petroleum products will intensify. These are the flipside of rising crude oil prices.”

According to him, “As oil price increases, government revenue increases, this is because the country’s earning from crude oil is about 60 percent. There is a positive relationship in this direction. The increase of the revenue gives the Federal Government the opportunity to fund the budget and attend to infrastructural issues and other social issues. It reduces our fiscal deficit.

“There is a positive correlation between crude oil price and reserve. It is positive on the part of foreign exchange earnings. This is because, as crude oil price increases, foreign exchange inflow also increases. It also helps to beef up our foreign reserve.

“There is also a positive implication for the exchange rate which has been under pressure over a period of time. The dollar inflow arising from increase in crude oil price, the supply side of the foreign exchange market is always also impacted. This development will further strengthen the Naira.”

Mr. Yusuf further noted that the current pump price of petrol is not sustainable under the rising crude oil prices, as the NNPC cannot continue to subsidize fuel consumption if crude prices continue to rise beyond this level. He warned that the government would be under pressure to shift the pump price from N162 to around N350 or N400 per litre, while still battling with the engagement with labour unions and civil society groups.

He said, “On the flip side, because we import all our fuels including AGO, PMS, Aviation fuel and others, this will affect prices at which we buy them locally. For Petrol, PMS, because Government pays subsidy on every litre of this petroleum product, fuel subsidy will continue to take away the expected gains of the rising oil price.

Tope Fasua, an economist who is also the founder/Chief Executive Officer of Global Analytics Consulting Limited, an international consulting firm charged the Nigeria government to redirect its focus on crude oil revenue earning and focus more on other sectors of the economy to drive the budget.

He stated the need for an aggressive push on taxation, solid minerals, gas sector and so on, to fund the country’s appropriation bill.

He said, “The Government is being optimistic as it should be, with its benchmark of 1.88 million barrel per day at $57crude oil price benchmark, which is a bit conservative, given that crude oil is trading at around $74. But,I would like to see more robust planning on other sectors of the economy to drive the budget, including things like taxation, solid minerals (which has not been doing well), the gas sector and so on.

“All these are also featured in the 2022-2024 MTEF, but I would like to see more aggressive growth, especially in our projection which will require some radical changes in the way we do our things. It calls for some behavioural and cultural changes which will also affect the guys at the top.”

He revealed that the rising oil price may not have real impact on the economy. He charged that, “As long as we focus on crude oil and all that – those normal premises we based the budget on – we would not be able to see the kind of radical, double-digit growth that we require to move ahead, as a country.”

He disclosed that the present administration’s anticipated growth is neither aggressive nor ambitious.

“The Government plans to grow the economy at about 4.2% next year, and then it drops to 2.3% in 2023, and it picks up to 3.5%. That’s not ambitious at all, given that 4.2% is barely above our population growth rate. We are talking of inflation at 17.92%.”

While calling for a more aggressive push for diversification of the economy, Mr. Fasua warned that Nigeria may be in trouble If the country’s economy is growing at that number and the naira is devaluing internally (which is inflation) by 18%.

Ademola Adigun, an oil and gas policy expert who is presently the Team Lead, Facility for Oil Sector Transformation, disclosed that the rising oil price would have no serious impact on the economy and the MTEF because the country is poorly managed.

According to him, “The rising oil price will have no serious implication on the economy. The truth is that the administration is not following international rules or guidelines. The government is not being run efficiently or following international parameters as initiated or desired. The economy decline says it all. I’m really at loss as to what will be the key issues in the appropriation act.

“The rising crude price will have no implication on the economy. The economy is not moving well – there’s no savings. The oil price benchmark on the budget is premised on false assumption. The country is under heavy borrowing to meet its developmental needs and there are serious revenue losses from major oil industry deals. Confusion is just everywhere and that is the situation we have found ourselves,” he said.