Mitigating effects of falling oil prices | Independent Newspapers Limited
Newsletter subscribe


Mitigating effects of falling oil prices

Posted: Apr 10, 2015 at 6:45 am   /   by   /   comments (0)


The recent declaration by the African Development Bank (AfDB)  that Nigeria is West Africa’s largest market with great potential to be a main driver of regional integration considering its population, contained in  the West African Mid-Term Review and Regional Portfolio Performance Review Paper 2011 – 2015 of the AfDb has drawn arguments from economic experts in the country that there is more, yet undisclosed reasons by the federal Government in its steps to source $2 billion  loan to assist in the implementation of its policies and programmes this year. In this special report, Sylvester Enoghase, Andrew Airahuobhor, Emmanuel Okwuke,  Abel Orukpe, Bamidele Ogunwusi and Olamide Bakare examines the issues and reactions of Nigerians to the loan.

The Minister of Finance, Dr Ngozi Okonjo-Iweala told journalists that to mitigate the effects of the falling oil prices, the present administration was planning a reduction in public expenditure and international travels by public servants.

The minister said that even though the drop in oil prices was a serious challenge, it was also an opportunity for the country to refocus efforts towards the non-oil sectors in preparation for a future with less oil revenue.

As part of the efforts to reduce expenditure, she said international travel within the public service would be severely curtailed, adding however, that critical infrastructure projects would not be affected because they were key to economic growth, development and job creation.

She said, “Every country that is well managed doesn’t just sit and allow a situation to happen to them. If they are well managed, they prepare the right set of policies to deal with the situation.

“Those days when we used to be like that in the ‘80s and 90s are over. In the ‘80s, when we had shock, we didn’t take measures by ourselves to adjust. We waited for others to come and tell us how to adjust. But now we have competent teams and our job is not to sit and wait, but, to craft a set of policies that will help us to address the shocks.


Special tax on luxury goods

The Minister said that the decline in oil prices had given additional impetus to the Federal Government’s focus on increasing non-oil revenues. In this regard, the collection target for the Federal Inland Revenue Service, which has been working with Mckinsey to increase receipts, will be revised upwards for next year.

She said the country had recorded good success in reaching the initial target set this year of N75bn; noting that so far, N65bn of this had been collected. For 2015, the minister put the revised target at N160bn above the 2014 base.

Okonjo-Iweala also unveiled plans by the government to introduce what she called “tax on luxurious goods,” stating that this was a part of measures aimed at increasing revenue from non-oil sources. She said that users of luxurious items, such as private jets, yachts, alcoholic beverages and expensive cars, would be required to pay special taxes for such goods.

The minister, who said the government was still compiling the list of luxurious goods to be taxed under the new initiative, assured that the proceeds from these items and services would be used to support the economy from external shocks.

She said, “We all know the definition of luxury goods, we are still compiling the lists and one of the things we can tax is champagne, alcoholic beverages, jets, luxury cars- we will look at the engine capacity, and yachts.

“We are putting the list together but we intend to do a surcharge going forward on these items.


$2bn withdrawal from Excess Crude Account (ECA)

Okonjo-Iweala noted that the reduction in the price of oil might continue but gave assurance that the government was fully prepared to ensure that the economy was not worse-off.

To this end, she said from the $4.1 billion (N656bn) in the Excess Crude Account, the government would be withdrawing $2billion (N320bn) between now and the end of this year to take care of critical expenditure.

She said, “We will work in such a way that we won’t deplete the ECA because we have to leave something for next year but we might go to tap about a half of it ($2bn) or slightly less than half to be able to meet expenditures that are crystalising at the moment that we need to make.”


Rejects calls to print more Naira

On calls from some quarters that the Federal Government should respond to the decline in revenues   by printing more naira to fund projects, the minister said that such recommendations would be disastrous for the country if implemented.

Okonjo-Iweala, who argued that such prescriptions ignored the elementary principles of economics, said “printing money without adequate revenue support will lead to serious consequences for the country.

“It will spur inflation as the experiences of Germany in the early part of the last century and more recently, Argentina and Zimbabwe demonstrate. This prescription will victimise the poor and the middle class that it is supposedly protecting.”

She explained that the best way to protect the interest of the ordinary people was to control inflation as much as possible, expand the economic base, strengthen the sectors that drive growth, boost critical infrastructure and create more jobs.

Meanwhile, financial experts have said that Nigerians should be ready for a harsh economy in the nearest future as a result of the continued fall in the prices of oil.

The experts, while reacting to the measures adopted by the Federal Government, stated that the decline was only the beginning. They spoke with our correspondents during separate interviews on Sunday.


Mr. Bismark Rewane gives kudos to FG

A renowned economist and Chief Executive, Financial Derivatives Company, Mr. Bismark Rewane, said that the step by the government was a good start, but wondered if the measures would actually cushion the impact of the falling oil prices.

He said, “The most important thing is the fact that the government has come to accept that it has to do something with respect to the falling oil prices. What we are seeing now is not a short-term phenomenon. Whether the therapy is adequate is another issue. But I think it is a good move and it has not ruled out other moves.

“On the $2bn withdrawal from the ECA, I don’t think that will make any impact. The reality is that we have to look at what is important. And what is important is that the Nigerian government has come to terms to the fact that it has to start austerity. So it is encouraging and this is the beginning of a number of steps to be adopted.”

On whether there might be more measures, Rewane said, “Certainly, this is just the beginning. And I will like to say that it will be good for Nigeria to accept the reality on ground presently.”


FG resolve not surprising

Also, a former President, Association of National Accountants of Nigeria, Dr. Samuel Nzekwe, said the government’s resolve to adopt austerity measures was not surprising.

He said, “About 80 per cent of our earning is from oil and so it is not a surprise that the government is adopting austerity measures considering the fact that oil prices are falling. This is actually the beginning of things to happen. Apart from imposing tax on luxuries, they should look at how to diversify the economy by creating enabling environment so that industries can thrive.

“Increasing or taxing more utilities is not the major solution. The government should now make more efforts to diversify the economy. They should make concerted efforts to ensure that the agricultural sector and a few others are working.

“Nigerians may not worry much about the tax issue because it is expected but this tax should be used wisely. It should not end in the pockets of a few individuals because since the country’s earning is mostly from oil, it means a fall in the price of this commodity will deny Nigeria a lot of income to build roads, power plants and many other things that will benefit the ordinary Nigerian”.

As the plan by the Federal Government take $2 billion from the African Development Bank (AFDB) continues to generate reactions, with most Nigerians condemning the move, the outgoing General Secretary of National Union of Air Transport Employees (NUATE), Comrade Abdulkareem Motajo, said that there is no reason why the President Goodluck Jonathan led government would take a loan of $2 billion from the Africa Development Bank (AFDB), less than two months to the May 29, 2015 hand over date.

He said that Nigerians cannot entrust such money in the hands of a government that has allegedly mismanaged Nigerian treasury with impunity, adding that instead of Nigerian to be a buoyant country, it is now a beggar nation.

Abdulkareem said that even if the AFDB had offered Nigeria the loan, the present government should have allowed the incoming government to decide whether it needs the loan or not. “I don’t think it’s necessary to argue about the $2billion loan the Federal Government wants to take from the AFDB to allegedly finance the 2015 budget.

“This is because it is uncalled for, it is unnecessary and of course one would suspect that with this type of government, that has mismanaged our economy and our oil to the extent that instead of being a buoyant and prosperous country ,we are now a beggar country and a country always looking for loans, I think at this point we cannot entrust any money in the hands of the Jonathan led Federal Government”.

“Even if the loan was an offer from AFDB to give us some money, I think the best thing to do is to wait to see the agenda of the president –elect, the incoming government that will be headed by Muhammadu Buhari to know precisely, whether they would have any need for this”.

“He has said when people were asking where he will get the money to implement his programmes; he said that he knows that Nigeria has the money. He knows where the money is and that he is going to stop all these lootings of public funds going on in the country.

“That means he would be able to address all these issues of budget, lack of money and the economy in general and budget. Nigerians should cry out against the present government taking the $2 billion from AFDB because there is nothing the government will do with it but to allow the money to end up in private pockets”.

Motajo said that what is shocking is that the present government has less than two months to hand over to the new government. “It is even more shocking that the present government want to take such huge amount less than two months to hand over to the new government” he said.

Reacting to the argument that the present government said they want to use it to finance 2015 budget, the outgoing NUATE scribe said that there was no way the present government would use the money judiciously or for the purpose it was meant for, wondering why the present administration would be looking for $2 billion loan from AFDB at the beginning of the implementation of the budget.

“In any case they are not going to service the budget because they have barely two months to stay in office. These two months, they should be using it pack their loads. If for anything it should not be at the beginning of budget implementation that we start looking for money to service it .They don’t want to anything. They just want to obtain the loan and loot it or maybe they want to pay themselves compensation”.

He argued that it is because the present government has mismanaged Nigerian economy that is why it is taking the $2billion loan.

Also reacting, the Executive Director, Centre for Aviation Safety and Research, Engr Shery Kyari, said that he does not think AFDB would be willing to give such huge loan to a government that is leaving in less than two months ,

He added that the bank may raise an eyebrow knowing full well that the present government will be leaving in a few days time and coupled the fact that the incoming government that will be monitoring the expenditure of the current government

“Well, if it is the same Peoples Democratic Party (PDP) led Federal Government that is going in less than two months time, I want to believe that the bank would want to back out of it. Beyond that even the AFDB would be skeptical about giving a government that is handing over in less than two months loan because they are not the only ones to pay for it.

“Then, the incoming government is likely to raise eyebrow because after knowing that they are coming to government now they must be monitoring the expenditure of the current government. Except the president-elect is sitting with the outgoing president and they are discussing economic issues of the country and they agree that the processes will continue”.

Speaking on the argument that the loan is to be used to finance 2015 budget, Kyari said that the 2015 budget is not for the present administration to implement anymore, advising the current government to be patient and allow the incoming government to decide if it wants to collect the AFDB $2 billion loan.