/Escaping the Looming Abyss (I)

Escaping the Looming Abyss (I)

‘The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is’ – Winston Churchill

 

As someone who has routinely warned about grave dangers if drastic changes were not made to Nigeria’s fiscal and monetary habits, I constantly carefully analysed and wrote on various risks factors that were narrowing Nigeria’s window  of making it out of over five decades of its oil windfall with something more than gloom, doom and a sad memory of missed opportunities

These risks ranged from the demand-side challenges from alternative and renewable energy sources and electric cars to seemingly myriad issues on the supply side including the fracking and shale oil that has decimated Nigeria’s crude exports to the US in particular. Lately (actually at different points over the last six years), the bemusing game of self-flagellation between Saudi Arabia and Russia to test the limits of global storage capacity by oversupply,  offering discounts  generally forcing a downward pressure on oil prices added an interesting dimension to these risks.

Three months ago, my outlook for Nigeria’s financial health was mostly as it had been over the last decade. My two main areas of concern were forex and the refined petroleum (downstream) sector, areas responsible for massive, but below the surface economic mismanagement and systemic leakages. I often hoped that:

1) If we could somehow realise that crude oil & its revenues are an ‘unearned’ seed that needs to be planted on the soil of complete downstream sector deregulation, we could harvest complementary and supplementary sources of income, foreign exchange and development that would include :

  1. A booming refining and petrochemical industry
  2. Enough gas to end all power generation woes.

This, coupled with our cheap abundant & underutilised labour could make a Nigeria a competitive regional manufacturing hub.

2) If we could curtail the relentless frittering of the largely crude sourced foreign exchange on economically unproductive things like tourism, pilgrimages, subsidising foreign education for the children of the elite and channel this to economically productive agents and activities, then we will be able to grow the reserves, and prevent the recurring trend of immediate pressure  on the exchange rate, whenever there is a sustained drop in crude prices.

In January and early February, Covid-19 seemed so far away and much less of a threat than the Lassa fever which was affecting a few states in the country. It was hoped that our exposure would be limited to observing the effects on Cable news stories like we did for the previous MERS and SARS outbreaks in Asia.

Covid-19 however rapidly triangulated its damaging tentacles on Nigeria’s finances as national lockdowns around the world exacerbated the impact of supply gluts and oil price wars. The drastically reduced demand pushed crude prices into negative territory, suggesting a hardly ever seen ‘supply squeeze’ where seller will be willing to pay ‘buyers’ to take the product to save on things like holding and storage costs of unsold crude. This also explains why 84 million barrels of Nigerian crude (over a month’s production) is reportedly floating at Sea with no buyers, as I pen these words.

Naturally connected to the crude oil revenue drop has been the scarcity of foreign exchange and the pressure on the naira exchange rate. This is hardly surprising given the systemic weaknesses previously identified and the fact that oil revenues is said to account for about half of Government revenue and  over 90% it’s foreign exchange.

A less obvious impact of Covid-19 is its impact on alternative sources of Forex. Remittances from Nigerians abroad is said to the about $20 billion annually and provide a number of economic benefits including:
–   an informal but substantial source of investments
–  a source of income and a crucial social net for millions
–   an underrated, but substantial source of crucially needed foreign exchange, even if the CBN & a leading Western company seemed determined to create an unnecessary Monopoly to  capture these inflows.

These inflows have dwindled to a trickle with the lockdowns and temporary loss of income affecting most of Europe and North America where the diaspora remittances emanate.

We are now witnessing instant shocks to the street exchange rate with the Naira depreciating by as much as 30% in the last couple of weeks.

I have written in the past about the qualities that a leader or key public servant looking to make any kind of positive impact in the Nigerian public service must have. These include Capacity (intellectual, experience, will-power, result oriented etc), Character and Courage. Based on this (especially the courage to stand up to political leadership when necessary), Nigeria’s financial leadership leaves some room for doubt.  For starters, Mele Kyari (or the NNPC he heads) has no business making pronouncements on key government fiscal and expense components like petroleum subsidies.  Perhaps he was emboldened by absurd suggestions from an even more senior public official that NNPC and not Nigeria was paying for petroleum subsidies.

The country is now reduced to desperately begging for funds from organisations that were themselves founded on unsustainable economic principles like the gold standard and fixed exchange rates between Western Countries. These organisations show no deep knowledge or sensitivity to the realities of a nation like Nigeria, and therefore cannot offer any substantially beneficial solutions. Forget the toga of economic advice, loan peddlers love desperate borrowers who will mortgage the house for a penny. After all, they are in the business of selling loans for a profit (i.e. for the benefit of shareholders or major subscribers & sometimes individual bonuses for the dealmakers)

Any conditionality will naturally be geared towards protecting the interest of the lender (including guarantees for the repayments of the principal and interest)  while the overall well-being  of the obligor will naturally be a minor and distant consideration.

 

Nigeria has had at least four warnings over the last dozen years to prepare for this.  Instances where crude prices dipped below $40 due to global trends, and events or where internal security and supply challenges almost halved crude output.  A couple of attempts at genuine fiscal and downstream petroleum sector reforms were made, but each was clinically suppressed by elements within the NNPC and the Presidency (using labour union leaders and misguided activists as fronts).

Interestingly, the steps recently suggested by Mele Kyari mirror the actions of the current Government’s favourite punching bag Diezani Alinson-Madueke (which I condemned at the time as well), where the Government announces a reduction of domestic petrol prices following a global crash in oil prices, but does nothing about dismantling the structures that makes it possible for billions of dollars to be unaccounted for annually, making It impossible to develop a vibrant downstream domestic sector.

The Petroleum Support Fund and the Petroleum Equalisation fund have to be completely scrapped as a sign of any seriousness in ending the subsidy regime and limiting the Government’s impact on this aspect of the Nigerian economy. NNPC (which ludicrously claims to be just another operator in the sector) and the PPPRA have no business setting the prices of petroleum products in the country. The PPPRA should either be scrapped or at become a unit of the Competition and Consumer Protection Commission. There is nothing different or special about petroleum products outside of the fact that the current import-focused subsidy regime makes it possible for billions to be withheld from the Federal account without any accountability.

If only for this reason only, NNPC must be barred from permanently operating in the downstream sector for good.

It is not surprising that one of the first major appointments of most Nigerian President in recent history is to appoint the GMD of NNPC. This is usually done well before a cabinet is even announced.

Prominent voices of reason have wondered if Nigeria needs a National Oil Company at all and have previously called for a complete dismantling of the NNPC proclaiming that, ‘if Nigeria does not kill NNPC, NNPC will kill Nigeria’. The USA, the largest crude producer in the world, the country with the most advanced oil and gas sector, and the country deriving the most benefit and revenues from its oil and gas sector, does not have an NOC. Protagonists will however counter with potential benefits that a well-run and transparent NOC should provide.

Even if some justification can be claimed for the operation of an NOC in the Nigerian upstream sector, there is absolutely no reason for any continued participation in the downstream sector given the disastrous outcomes and results over the past decades. The only plausible reason has to be for continued access to billions of dollars that will never be accounted for through the ‘losses’ from refining operations and the ‘deductions for subsidy reimbursement’ from petroleum imports that cannot be adequately verified.

Brief Profile of the author

Jide Olateju

Jide Olateju has had a passion for economic development and poverty reduction in Nigeria since his primary school days. This passion was a driving force behind his Graduate Degree in Development Economics from Yale University, and subsequent work on reform initiatives in Nigeria’s Ministry of Finance.

He has worked with Arthur Andersen, SAC Capital Advisors, and was part of the team that launched Konga Online Shopping, where he served as the first Vice President overseeing Finance, Administration and Human Resources.

He currently provides strategic advice to Technology startups, and supports a work-study mentorship for gifted graduates of public secondary schools in Lagos State.