Nigerian Economy: Bubble about to Burst

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From the Presidency, to Finance Minister Okonjo Iweala, up to the least in hierarchy of this regime, there has been ongoing murmuring about the economic tsunami that is fast approaching. Nigerians seem not to be too bothered about this inaudible cry of the regime; it has been a case of Government just crying to itself. This apathy of the people might prove catastrophic when this economic disaster eventually hits, because it is not a mere rumour mongering of the regime, incoming economic disaster is real and it demands that we adequately prepare.

Why masses are pathetic?

Why will people not be apathetic when few weeks ago the same Government publicized a statistic that says Nigeria economy has been growing at average of over 7% for over 5 years? Just two months ago, there was an official jubilation over the impressive growth of Nigerian economy that made it the third fastest growing economy in the world, so fast that it was already predicted that Nigeria economy will soon overtake South African economy. In 2006, Obasanjo regime, which this regime is just an extension of, packed a whooping sum of 12 Billion US dollars and handed it over to offset the so-called “Nigeria debt”. This is apart from the undisclosed amount paid to Okonjo Iweala consultancy outfit that facilitated the buy-back and close to 2 billion naira spent to celebrate Nigeria exit from debt trap. They promised us a better future out of damning debt burden, a rosy economy without the agony of debt over-hang. Why then this sudden change of song?

The worst economic recession and austerity finally here

Nigeria is a mono-economic state. Oil and gas contribute over 90% of foreign earnings and over 80% of government revenue. Oil and gas remains the live wire of Nigerian economy, Nigeria is oil and oil is Nigeria. Oil economy gives us an idea of how the future of Nigeria economy will likely be and unfortunately, oil and gas sector is not looking rosy. The fall of oil price from $128 per barrel in March to a price of about $97 per barrel in June, resulted in the loss of monthly revenue of $1.8bn and expert says it will hit $2bn if the price gets to $90. Recently, a forecast by Religare Capital Markets, a global emerging market specialist firm, stated that Brent crude would fall to $90 a barrel by September corroborating similar predictions by other analysts. The predictions were based on the fact that since March for the first time since 2006, oil production has been above consumption level.

According to the Energy Intelligence Group, global oil consumption has been declining since the end of 2011, falling to 88.5 million barrels per day at the end of April, from 90.4 million barrels per day in late December 2011, while the production has consistently been increasing for a year now. It is a double jeopardy for Nigeria; the United States, following the increase in its domestic production and a series of refinery closures, has drastically cut back oil imports from Nigeria. In February, the US imported 352,000 barrels per day against over 1 million a year earlier (at this time Washington was the biggest buyer of Nigerian crude), according to the US Energy Department’s Energy Information Administration. This marked a very huge lost of market for Nigerian. There is already close to 30 million barrels of unsold crude for June and July alone. There is an ongoing attempt to compensate for this drastic fall with a surge of Chinese demand. But this option too has its associated challenges, apart from economic slowing down in China, which is reducing the demand already; the voyage from the Nigerian oil terminal of Bonny to the Chinese harbor of Tianjin is 17,000 kilometers, while it is just over 8,000 km to New York and 7,000 km to Rotterdam, in Europe. Chinese is already demanding a significant discount to offset this extra cost. The implication of this is that, Nigerian oil to China will be priced lower than the international price of oil and this will even only become a reality if China agreed to leave her long time supplier(Angola) for Nigerian oil. Therefore, everything is pointing towards a single direction; Nigeria is being challenged with a significant reduction in foreign exchange earning and drastic cut in government revenue, this situation is set to get worsen and what does this mean to economy as a whole?

What to expect?

When oil price crashed in 2008 to $40 per barrel, it exposed most glaringly the fragility of Nigerian economy. The first casualty was the banking industry; it revealed how heavily dependent the financial sector is on oil and gas. The sector almost completely collapsed and up till now, it is still trying to find its feet. It was the collapse of banking industry that brought down the stock exchange and till now it is still in a very terrible state. Therefore, if 2008 oil price crash had such an effect, this fast approaching crash is expected to be much more devastating. Unfortunately, the expected effect goes even far deeper than this.

States governors are already accustomed to gathering once in a month to receive their monthly allocation from federation account. Internally generated revenue remains absolutely insignificant compare to the hand-out from federation account. Total internally generated revenue of all the combined 36 states with FCT at about N441.1 billion is just 6.5% of 6757.068 billion shared from federation account.  Many states internally generate less than 10% of their monthly expenditure; some are even as low as less than 1%, except Lagos, which generates about 70% and curiously enough, Sokoto generates close 50% of its expenditure. We need to be careful with this impressive figure of Lagos; it is side by side with international debt profile of $491,847,295.53, this constitutes approximately 9% of country’s total external debt, apart from over internal debt of 100 billion naira in bonds. It is ironical that most of the Governors of these states are coincidentally the major advocate of “true federalism” without the required resources to stay autonomous.

According to FDC, “Global oil prices are dropping while Nigeria’s external reserves remain robust. The question, however, is how vulnerable are Nigeria’s external reserves, should oil prices drop further, for example, to a low of $80 per barrel? “The federal government’s budget is bench-marked to oil price at $72 per barrel, while Bonny Light crude is trading at $98 per barrel. This is a variance of $26 per barrel. Using our regression model, at the current rate of decline, we expect foreign exchange (forex) inflows to fall from $4.31 billion in January to $3.34 billion in July. If oil prices were to drop to $80 per barrel (which is 50% likelihood based on current trends), there is a 95% likelihood that forex inflows will decline to approximately $3.03 billion. In this situation, Nigeria’s external reserves would be expected to follow suit and drop to a value as low as $22 billion, covering less than three months of imports. Resultantly, the CBN may be forced to allow the naira to depreciate sharply to N165/$1, to compensate for the substantial loss in oil revenue.”(ThisDay Live, June 24)

Above statement was made by Financial Derivates Company on 24th of June, the tone was as if N165/$1 will be far away in the future because the exchange rate then was just N154/$1, but less than a month later it reached N162.10 to a dollar(13th July rate). By the time foreign exchange speculators, who are always around the corner step in, the rate of fall of Naira is expected to accelerate much more. The total value of the nation’s exports in first quarter of 2012 was valued at ₦4,969.7 billion, while the total value of the nation’s imports stood at ₦1,652.3 billion in first quarter of 2012; this gives a positive balance of trade. Exports by section revealed that Mineral Products (oil and gas) contributed ₦4,189.1 billion or 84.3% of the total exports. Therefore a crash in oil and gas sector of the economy will reverse this positive trade balance and in an extremely import dependent economy like Nigeria. More pressure on Naira is expected in the coming period, which will further bring down the value of Naira and inflation which is already very high at approximately 13%, is expected to climb at a much faster rate. Machine tools and associated parts constitute 18.5% of the total import, a devalued naira will negatively impact on this and consequently, already comatose manufacturing sector which is just barely 1% of GDP will definitely get worsened and the explosive rate of youth unemployment which presently stands at 42.2% will soar and in its wake, more crimes and increased socio-political instability. No doubt, the fast approaching stagflation is set to be the worst economic crisis in the history of the country.

Capitalist way out is a road to hell

Based on capitalism, there is no any other option other than hurling this burden on the head of already over-burdened Nigerian working class and poor. The regime is already soliciting for a very little bailout from China; soliciting for a loan of $7.9 Billion. Nigeria presently has debt of about $44 Billion, with $5.9 billion external, a whooping sum of N559.6 billion is used annually to service this debt, and this amount is higher than the budget for health and education put together. If another $7.9 Billion is eventually approved, it pushes the debt to $51.9 Billion and the servicing alone skyrocket. Obviously, this amount being begged for will never be enough to offset the shortfall; it will only be the beginning of the aggressive search for fund and it will necessarily have to go hand in hand with severe austerity measures. For over 30 years now, it has been one attack upon the other against Nigerian workers and masses in general by Nigerian ruling class.  No pension is paid, no living wage, power non-existent and Nigeria has one of the worst health delivery system in the world, collapsing educational system, wide-spread homelessness and crushing poverty, what then will new era of austerity means now for Nigerian masses? On the basis of capitalism, it is agony without end for Nigerian masses, but how long more attack can Nigerian masses take?

Conclusion

There is obviously alternative route to this calamity. Least we forget; over 3 trillion Naira was spent to rescue banks during last crisis, why rescuing the rich while leaving the poor to die? Nigerian workers demand that no more bail outs for the rich. No reward for the fat cats! Nationalize the banks and insurance companies under democratic workers' control and management. Banking decisions must be taken in the interests of the majority of society, not a minority of wealthy drones. Compensation for nationalized banks and other companies must be paid only in cases of proven need to small investors. The nationalisation of the banks is the only way to guarantee the deposits and savings of ordinary people and make available enough resources to lift overwhelming majority of Nigerians from crushing poverty. How best to tackle unemployment? Work or full maintenance for all! We should reject business secrets! Open the books! Let the workers have access to information about all the swindles, speculation, tax dodges, shady deals and excessive profits and bonuses. Let the people see how they have been swindled and who is responsible for the present mess! No to factory closures! A factory that closes is a factory occupied! Nationalization under workers' control and management of factories that threaten to close! For a wide-ranging programme of public works: for a crash building programme of affordable social housing, schools, hospitals and roads to give employment to the jobless. For the immediate introduction of a 32-hour week without loss of pay! This is an alternative to destructive force of capitalism, this is a socialist path; a path of emancipation and genuine freedom. To expect the present crop of ruling class to carry out these above-mentioned programs is to expect camel to pass through a needle eye. The pre-condition for us to carry out these is to take power and for us to take power we need a mass party, led by the working class; the primary task standing before us today as before is the building of this mass party resting on socialist programs.