Thursday, June 28, 2012


Presidents don’t talk down their country; they try to exude confidence, especially in the era of hyper-globalization where even the most innocuous statements could cause panic in the financial markets. This may explain President Goodluck Jonathan’s assurance at his media chat last week that Nigeria was not broke. ‘If the country is broke, you won’t see most of the investors running over themselves to invest in the country,’ he contended. Nigeria technically broke? No, but the signs of an impending financial and economic storm are unmistakable. The two most poignant danger signals are the fuel subsidy budget and the likely continued decline in the price of crude oil, both of which will continue to deplete the nation’s foreign reserves and depreciate the value of the naira. They will ultimately escalate inflation, stifle economic growth, and eventually kill Jonathan’s ‘Transformation Agenda’.
Nigeria budgeted N888 billion ($5.55 billion) for its fuel subsidies in 2012, but the Nigerian National Petroleum Corporation (NNPC) and the Finance Ministry claim that N451 billion of it has already been spent on back payments for 2011. Finance minister and coordinating minister of the economy, Ngozi Okonjo-Iweala, says additional $4 billion or N620 billion was needed to ensure subsidy is paid. To do this, government must raid the $3.5-$4 billion excess crude account (ECA), resulting in a whopping N1.51 trillion going into paying for subsidy. The oil marketers – the main beneficiaries of the subsidy largesse – reportedly owe international banks another $3.4 billion (about N530 billion). If paid, this could push the subsidy payment this year to about N2.04 trillion.
The NNPC is also covering additional cost of imports with opaque crude oil swaps. If the swaps are monetised, Nigeria could actually be spending more than 50 percent of its budget on subsidy. If about 70 percent of the 2012 budget is allocated to recurrent expenditures, then very little is left for capital expenditure, let alone funding critical planks of Jonathan’s ‘Transformation Agenda’ like public infrastructure projects, education, and healthcare. The Central Bank of Nigeria (CBN) and many economists have warned about the unsustainability of the subsidy, but government isn’t listening. The nationwide shutdown by labour and civil society groups when subsidy removal was announced in January is still haunting it.
Unfortunately, Nigeria doesn’t have much of a buffer against its oil-dependency in case of a severe global oil price shock – the ECA was $20 billion in 2007, and continues to be a cash cow for odious discretionary spending. Early this week, the North Sea Brent crude oil climbed back to $93.02, from its 21-month low of $88 on June 21. This uptake reflects renewed, but misplaced, optimism of an upcoming eurozone summit breakthrough. The rally may also be a function of the renewed tensions between Syria and Turkey; tightening supplies due to news of a widening impact of a strike by Norwegian oil workers (particularly as refinery runs increase following the spring maintenance period); the impending European Union embargo on Iranian crude-oil imports; and news of South Korea’s halting of its import of Iranian crude oil indefinitely as of July 1. The long-term trajectory, however, shows relatively weak demand fundamentals, continued flow of heavy oil output from Saudi Arabia, and the continued threat of worsening relations with Iran. Last week, more than a dozen Nigerian oil cargoes were still unsold for July, just a week ahead of the expected announcement of new loading programmes for August.
Nigeria’s bleak future is being exacerbated by the escalating monthly loss of $1.2 billion or more to oil theft by criminal networks whose activities have expanded rapidly under the Jonathan administration. These fiscal revenue losses could renew pressure on the exchange rate, further accelerating the depletion of the nation’s foreign reserve. CBN ‘stable currency’ dream would be an exercise in futility. Last week, Bismarck Rewane of Financial Derivatives Company Limited warned that the substantial loss in oil revenue could whittle Nigeria’s external reserves to as low as $22 billion (covering just 3 months of imports) from its current value of $37 billion, forcing the CBN to sharply depreciate the naira to N165. Finbank Capital, another financial analysis firm, projects an interbank rate of N163 and N170/$ by end-2012 and end-2013, respectively.
While it’s true that many foreign investors want a share of energy and infrastructure projects in Nigeria, foreign portfolio inflows into naira-denominated treasury bills and government bonds, which had accelerated earlier in the year, have fallen off lately, on the back of weakened global economic outlook, as investors take a flight to safety, exiting their holdings of about $5 billion in naira debt, for the traditional safe havens of choice like the dollar, US treasuries, German Bunds, and gold. The Debt Management Office’s planned sale of N83.9 billion ($515 million) in debt (including up to N30 billion of 15.1 percent bonds due 2017) in the coming week may flop, despite yields on the existing 2017 notes rising seven basis points to a record high of 15.71 percent on June 25.
These ominous signs may not be so apparent in Aso Villa, but the truth is that debt overhang could debase Nigeria’s credit rating, if the debts are not paid on schedule. Inflation, which slowed to 12.7 percent in May from 12.9 percent in April, is projected to peak at 14.5 percent in the third quarter, according to CBN. The lending rate has been inching up of late, to 28 percent officially, as against 26 (unofficial rate is between 29 and 30 percent). The CBN will resist easing up on the lending rate because higher inflation would finish the job started by depleting forex and depreciating naira exchange rate. Economic growth will be stifled, further draining the meagre government revenue from non-oil sector. If these signs of impending perfect economic storm aren’t sufficient reasons for ending fuel subsidy in Nigeria, I don’t what is.

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