By Moses Obajemu
- As oil prices plunge
- Apprehension over FG’s borrowings
- ‘Worse-than-ever’ recession on the horizon
As oil prices tumble in the wake of the low oil demand occasioned by the outbreak of the Coronavirus pandemic, there are fears that the 2020 federal budget may hit a deficit of N4 trillion, nearly half of the N9 trillion budget.
Even more alarming are concerns in some quarters that the economy could relapse into Recession 2.0 (R20), which could be worse than ever experienced by the country. One analyst has pointed to five factors that supports why it would be the worst ever, should R20 happen.
The federal government had projected a budget deficit of N2.2 trillion for the 2020 fiscal year, out of a total budget of N9 trillion anchored on a crude oil price of $57 per barrel. However, Brent crude price has moderated to $49 per barrel, the lowest since 2017, thereby raising the spectre of a large scale budget deficit.
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Commenting on the falling oil prices and implications on the Nigerian economy, analysts at Afrinvest and United Capital said weakened oil price will worsen the fiscal position of the federal government.
“The implication of lower oil price would be an expansion in fiscal deficit beyond our projected N4 trillion which is 1.8 times the federal government’s forecast of N2.2 trillion,” analysts at Afrinvest said.
In addition, they said weaker oil prices and the flight of foreign capital to safer havens mean there is poor prospect for reserves accretion.
On their part, analysts at United Capital said that with oil price below the benchmark price of $57 used for preparing the budget, this may widen the budget deficit due to lower oil-revenue.
Concerned about the development the federal government dropped a hint last week that it might review the 2020 budget as crude oil revenue comes under pressure from the effects of the raging coronavirus infection globally.
Zainab Ahmed, the minister of finance, budget and planning, said in Abuja that the government was worried about the drop in oil revenue and would soon start a mid-term review of the budget to determine the way forward.
“We are concerned about the current drop in oil price because it’s now below our budget.
“We will do a mid-term review, and if the impact is so much, we will need to do an adjustment in the budget, working together with the National Assembly,” Ahmed told State House correspondents after Wednesday’s Federal Executive Council meeting in Abuja.
But a much larger fear of the economy relapsing into recession for the second time in under five years is getting analysts on edge.
Wilson Rume Erumebor, an economist and analyst, shared this concern in an analytical piece last week accessed by business a.m. in which he stated that Nigeria’s next recession will be worse than ever.
“On Friday, February 28, 2020, Nigeria reported the first confirmed case of the Corona virus. Prior to this, Nigeria has been feeling the impact of the virus through declining crude oil prices in the international market. Oil price (Bonny light) declined from US$70 per barrel (pb) in January 2020 to US$50pb on February 28th, below the 2020 budget benchmark of US$57pb. With oil price as low as US$50 pb and a possibility of falling further, in addition to wavering oil production, the finances of the Nigerian government and the country’s exchange rate will be negatively impacted and this will spill over to the rest of the economy. Nigeria’s recent experience of an economic recession was in 2016/2017 when crude oil price fell significantly to US$26 pb in January 2016. As a result, external reserves fell to a low of US$24 billion in October 2016 while inflation reached an all-time high of 18.7% in January 2017. The recent drop in crude oil price as a result of the virus, if sustained, has a possibility of leading Nigeria into an economic recession by 2021. What is even worrisome is the weak macroeconomic fundamental which suggests that the next recession could be more fatal than the previous one,” he stated.
He said the five factors that would make the next recession worse than ever are the fact that Nigeria does not have adequate external buffers; the environment not being friendly for both foreign portfolio and direct investments; the country’s higher and rising debt levels; the weak resilience of its private sector; and the rising inflation rate.
Other analysts have also expressed concern that the loss of revenue caused by the falling oil price may force government to borrow more thereby increasing the debt profile of the country and bear the attendant high cost of debt servicing.
The aggressive nature of this borrowing is causing concern given low revenue and high cost of debt servicing, which puts debt sustainability at risk.
Last week, the senate approved the $22.7 billion loan request of President Muhammadu Buhari, after a heated debate that ended up in a closed session.
The lawmakers came out of that closed-door session, which lasted about 45 minutes, and approved the two-item recommendation of the committee on local and foreign loans, chaired by Clifford Ordia.
Ahmad Lawan, the president of the senate, pledged that the loan would be spent on projects that would have an impact on the lives of Nigerians.
He also challenged the various committees of the red chamber to ensure strict oversight so that every dollar in the loan would be accounted for.
The bulk of the loan would come from the Islamic Development Bank, African Development Bank, the World Bank and banks from China, Japan and Germany.