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Falling global oil prices in the past couple of weeks put Nigeria’s economy at great risk, hence the need to adopt tighter fiscal and monetary policy, Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala has said.With Nigeria’s economy dependent on oil, – crude oil export accounts for about 83 per cent of Nigeria’s total export – continued fall in global oil prices calls for action in order to ensure economic stability. She however said borrowing is not an option for the country.
“As external pressures mount in the face of falling commodity prices, the pressure to ‘go a-borrowing’ to maintain fiscal expansion will also increase. But we cannot afford to do this. We need to make necessary adjustments with tighter fiscal and monetary policy, and we need to build up economic buffers beyond the mere 5.4 months of imports the region is estimated to have,” the minister said at the Institute for International Finance’s 2014 Africa Financial Summit in Lagos, hosted by Access Bank Plc.
She also noted that countries across Africa must rise to the challenge the current global economic situation poses on their economies.
“Without a doubt, this slowdown in global economic activity, coupled with the end in the quantitative easing in the United States of America, will affect sub-Saharan Africa’s economy, in addition to other regions specific challenges we face at the moment,” said Okonjo-Iweala
“As we all know, many countries on the continent depend on commodity exports as the main source of revenue.
“Nigeria and other countries in the African continent must step back and learn the lessons of the ongoing economic transformation in the country. The Federal Government has put in place strong stabilization policy, but the most important thing is that we must be able to sustain it,” she noted.
She also advised that Nigeria and other countries across Africa should look for alternative revenue sources.
“Still on improving macroeconomic performance, countries in the region must aggressively look for alternative sources of revenues and stem leakages. It is now imperative to drive up domestic resource mobilization especially taxes,” Okonjo-Iweala said.
The sustained fall in crude oil prices may lead to the devaluation of the country’s currency, the naira, which will spark inflation and its attendant reduction in the purchasing power of Nigerians, analysts have said.
International benchmark Brent crude, against which Nigeria’s oil is priced, on Thursday plunged further and hovered around $79 and $80 per barrel.
The price of Organisation of Petroleum Exporting Countries’ basket of 12 crudes, which include Nigeria’s Bonny Light, stood at $76.96 per barrel on Wednesday, compared with $77.27 the previous day, according to OPEC Secretariat calculations.
The naira has been under some pressure this year, with key contributory factors being portfolio investment outflows in the context of global rebalancing, the abrupt suspension of the former Governor of the Central Bank of Nigeria in February, unaccounted capital outflows and lower oil revenue, FBN Capital noted in its Nigeria Macroeconomic Guide 2014.
A Partner, African Capital Alliance, Mr. Paul Kokoricha, said in a telephone interview with our correspondent that as oil prices continued to decline and the country’s production not increasing, it meant that the capacity to earn foreign exchange would reduce.
“It will result to difficulty in balancing the fiscals. When government finds it difficult to balance its fiscals, it has to do a number of things to make up for the shortfall. For example, it could be by borrowing money from the domestic market,” he noted.
Kokoricha said the second and most important impact was the reduced ability to defend the value of the naira, adding that the government would struggle to defend the currency and that was where its possible devaluation was likely to come in.
“If it (oil price slide) continues for a lengthy period of time, certainly one can foresee a devaluation of the naira. You need those dollars to finance your imports. So, as you run down your reserves and you continuously need dollars to finance your imports, the only way to make up for it is to let the naira fall against the dollar,” he said.
On the likely implications of the devaluation of the currency, Kokoricha said because of the high import dependent nature of the country’s economy, the immediate impact was inflation, which could run into double digits.
“Inflation has been in single digit for quite a long time now. So, we are likely going to see inflation going up to double digits. What that means, therefore, is that it erodes people’s consuming power. Of course, it is a challenge to the entire economy,” he added.
An energy specialist at Ecobank, Mr. Dolapo Oni, said, “I expect oil prices to now head for $73 per barrel, while we produce two million barrels per day. This could pressure the naira towards N180 per dollar.”
The Head, Macroeconomic and Fixed Income Research, FBN Capital, said in an emailed response to enquiries by our correspondent, “We are at or near the bottom in the fall in oil prices. The CBN will be able to maintain exchange rate stability at its auctions because of its cushion of reserves. It may well move the mid-point within the corridor.
“However, it is transferring demand by administrative measures to the interbank market, where the currency is depreciating. Everything changes if there is a sustained further fall in oil price. This is not our expectation. It will bring a sharp devaluation as in Q4 2008 and Q1 2009.”
A former Governor of Lagos State and National Leader of the opposition All Progressives Congress, Asiwaju Bola Tinubu, said in his suggestion on how best to shape economic policies during this period of falling oil prices, “There is no logical reason to peg the flow of naira into the economy to the flow of dollars received. The correct perspective is not to mechanistically restrict naira expenditure to dollar intake.
“The better methodology is to ascertain, then achieve, the level of naira expenditure needed to expand the economy and create jobs without causing inflation to rise to dangerous levels. This is how broadly-shared prosperity is generated in a sustainable manner.”
He said in the face of recessionary headwinds, the government should run countercyclical fiscal policy by using its naira sovereignty to fund fiscal deficits, adding that the deficit was not simply for the sake of running a deficit.
“The fund cannot be spent on non-productive matters. It must be used to fuel infrastructural and other projects that not only employ great numbers of people, but enhance the overall productivity of the economy. To accomplish this, the Federal Government needs to reverse the inimical, ‘dollarisation’ of the national economy,” he added.
The Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, on Thursday stressed the need for Nigeria and other countries on the continent to adopt belt-tightening measures in order to cushion the effects of the dwindling prices of crude oil on their economies.
The minister said this in a keynote address titled: ‘Positioning Africa in the Context of an Uncertain Global Environment,’ which she delivered at the third annual International Institute for Finance (IIF), African Financial Summit 2014, hosted by Access Bank Plc in Lagos.
She emphasised the need to plug leakages, increase the drive for revenue as well as develop the non-oil sectors in the continent.
The minister also urged policy makers in the continent to strive to ensure that economies in the continent continue to prosper, saying with the right policies, Nigeria and other nations in the continent would be able to sustain their growth path despite the economic headwinds.
Okonjo-Iweala however pointed out that “the central focus of these thoughts is that Africa must truly diversify its economic base to create jobs for young people and become more self-reliant and better integrated to position itself better in an uncertain global environment.
“First, I believe that whatever it is that Africa was doing right to get to this point, we must continue to do. And in this spirit, I believe we must continue with sound macroeconomic management.”
She revealed that Africa’s debt-to- Gross Domestic Product (GDP) ratio of about 30 per cent, fiscal deficit of about 3.3 per cent and inflation projected at 7.3 percent for the year 2014 are at reasonably low levels, saying that as a result of these, many countries in the region have been able to access the international credit markets at low interest rates.
However, she noted that external pressures mount, in the face of falling commodity prices, “the pressure to “go a-borrowing” to maintain fiscal expansion will also increase.”
She added: “But we cannot afford to do this. We need to make necessary adjustments with tighter fiscal and monetary policy, and we need to build up economic buffers beyond the mere 5.4 months of imports the region is estimated to have.
“However, these adjustments need not stifle growth. For instance, fiscal consolidation must be done in such a way that government expenditure will be refocused on quality items that will unlock growth and job creation in the continent. Such quality investment should focus largely on infrastructure and human capital development- the two strongest binding constraints on the continents progress.
“Still on improving macroeconomic performance, countries in the region must aggressively look for alternative sources of revenues and stem leakages. It is now imperative to drive up domestic resource mobilisation especially taxes.
Continuing, Okonjo-Iweala said: “In several African countries including Nigeria, tax revenue to GDP is below 15 per cent – the conventional International Monetary Fund threshold for satisfactory tax performance.
“There are many leakages and gaps to be plugged, and more effective tax administration could contribute to improving revenues. For instance the Washington-based think-tank Global Financial Integrity, finds that at least 60 per cent of the nearly $1 trillion in illicit flows from the continent is due to trade mispricing and international tax invasion.
“So one can only imagine the boost to revenues if this practice can be curbed. This is why we have asked GFI to carry out a study on Nigeria. This, together with the work being done by McKinsey to strengthen tax collection will go a long way to support our efforts to drive revenues up.”
In his presentation earlier, the Group Managing Director/Chief Executive Officer of Access Bank Plc, Mr. Herbert Wigwe, noted that Africa is currently a hub of international economic evolution, a place of tremendous innovation in financial services, telecoms and natural resources; and, increasingly, as well, an important driver of global growth.
According to Wigwe, more wealth has been created in Africa in the last decade than at any other time in history.
“Across the continent we have seen a steady drumbeat of democratisation and political reform as governments are, with some exceptions, starting to provide the environment for businesses to thrive.
“They are creating greater feedback from and accountability to their citizens; ensuring that people’s needs are known and addressed. From Rwanda to Nigeria, we have seen a steady increase in security of title and the rule of law; investment in regulatory and physical infrastructure to ease the doing of business; and a low-debt, low-inflation, macro environment.
“All of these factors together help to build the first pillar of the African investment story – no longer is this the continent of coups and generals; instead it is a place of democraty as well as economic growth,” he added.
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