Nigerian Economy Slows on Crude Price Volatility

H.T Soweto.

Around the third week of August 2015, US Brent crude (against which Nigeria’s crude is benchmarked) crashed to an epic $37.75 before rising in a 3-day rally early last week to $47.17. The rally notwithstanding, oil fundamentals remain the same i.e. supply over stripping demand. This means that the price rebound would most likely be short-lived.

From the summit of $115 in June 2014, the oil price has been on a steep decline sending jitters into the spines of oil producers like Nigeria where crude oil exports accounts for 70 per cent of government revenue and 90 per cent of foreign exchange. Consequently, Nigeria – Africa’s top economy and largest crude oil producer – is experiencing a slowdown. Latest report from the National Bureau of Statistics (NBS) shows that in real terms, Nigeria’s Gross Domestic Product (GDP) grew in the second quarter of 2015 by 2.35 per cent (year-on-year) – lower by 4.19 percentage points from growth recorded in the corresponding quarter of 2014. This is the lowest GDP growth in a decade!

This threatens the mass of Nigerians with the terrible prospect of a recession after an oil price boom in which the vast majority did not enjoy the fruits. The social and political backlash of the economic crisis will also prove terrible for Buhari government which on May 29 came into power on the platform of a campaign which promised to tackle corruption and increase spending on social programmes whilst preserving capitalism. Certainly the government in spite of its alleged good intentions would, together with measures to curb corruption, try to implement austerity measures as the best step, from the point of view of neo-liberal capitalism, to arrest the economic decline.

Last year Nigeria officially grew by 6.3 per cent. According to latest International Monetary Fund (IMF) forecast, growth will decelerate to 4.8 per cent in 2015 – about half of the average of the past decade. Nigeria’s Stock Exchange All Share Index weakened 8.7 percent this year – “the sixth-most among 93 global indexes” tracked by Bloomberg. The country’s currency, Naira, has had to be devalued twice losing about 15 per cent of its value. From N155 last year, N197 naira now exchanges for a dollar at the official exchange rate market and over N218 at the parallel market. Alongside a consequential rise in the price of imported goods, annual inflation rate hit 9.2 per cent in July – the highest in more than two years.

This is in addition to a severe cash crunch that has hit both the public sector and the financial market. In June, about 18 states went nearly bankrupt as they were unable to pay workers salaries and pensions leading to a special bailout organized by the Central Bank of Nigeria (CBN) which saw a loan package worth N338 billion and repayable at interest rate of 9 per cent over the next 20 years. This is in addition to a planned rescheduling of about N660bn debt which is converted to 20 year Federal government bonds. But, even with this bailout, there is no prospect in the coming period of a stable financial situation for the states especially as revenue from crude oil sale continue to fall. Most likely, another default in salary and pension payment in a few months’ time is quite possible with dire consequences for workers and their families.

Unemployment

With growth falling, so also is job creation which in the second quarter declined by 69.9 per cent. That is a wipe off of over 327, 702 jobs! Annually, Nigeria’s labour force receives between 1.8 million and 2 million new entrants. At the best of times, little over a million jobs are created every year. Meanwhile in the same quarter, Nigeria’s working age population increased by a slight margin to 103.5 million. Yet the total number in full employment decreased by 1.3 million – an evidence of job losses and those previously in full-time being forced into part-time jobs through outsourcing etc.

While the official unemployment rate increased to 8.2 percent in Q2 (a third consecutive rise in the rate since Q3 2014), the physical reality appears more disturbing. Nigeria’s army of unemployed is swelling to frightening levels. A glimpse of its massive size is given in the NBS data which showed that while on the one hand 19.6 million people between ages 15 – 64 are either unemployed or underemployed, there are additionally 29.5 million persons within the economically active or working age population who “decided not to work for various reasons” in Q2 2015. Taken together, these are 49.1 million jobless people out of an economically active population of 103.5 million! They can only survive with the support of their families, begging or crime.

A few “lazy” people refusing to work might make sense. But 29.5 million persons (a figure higher than the total population of many neighboring African countries including Cote d’Ivoire) make no sense. A number of factors could account for this figure not least of which is the phenomenon of long term unemployment. For older unemployed people, it makes no sense to keep trying every year to get a job when new younger entrants into the labour market are not getting any. For instance over the period under review, the number of unemployed in the labour force increased by 529, 923 persons or 9.58 per cent. Also the number of those underemployed grew by 1, 362,274 (11.16 per cent). It could also mean that a number of young people do not bother trying hard to get a job given the bleak prospect. As NBS Statistician General Yomi Kale said recently in a speech at Chatham House (the British foreign ministry’s “think tank”) “the jobs being created are largely informal, blue-collar jobs by micro business while graduates are looking for formal white-collar jobs that do not exist in the necessary numbers”. In any case, the NBS revelation gives a glimpse of the enormous social explosion being prepared by the economic crisis which capitalism has entered in Nigeria.

For about a decade, Nigeria grew by an average of 7 per cent buoyed by high crude oil prices. But much of the growth proceeds were creamed off by the country’s tiny ruling elite through wanton corruption but also through neo-liberal capitalist policies of privatization deliberately packaged to enable the elite to buy off at rock bottom prices choice state assets and oil prospecting licenses or to import refined petroleum products. Inequality and poverty level has increased with over a 100 million – out of a population of 180 million – considered living in poverty.

Oil Price

Rather than a sign of a turn for the better, the Monday August 31 rally in oil price is an indication of the “volatility in the crude oil market and the extreme movements possible”. With oil fundamentals remaining unchanged, there is every likelihood that crude oil price could still crash down to the region of $30 per barrel. As Randy Ollenberger (Managing Director of oil and gas at BMO Capital Markets) pointed out in an interview with CNBC’s “Power Lunch”: “We’re not out of the woods yet. We’ve got physically way too much oil in the market, whether it’s in inventories or supply currently being pumped and now the demand side of the equation looks like it is stumbling a little bit with the bad news coming out of China” (Quoted by CNBC Tuesday 01/09/2015).

The rally occurred for two reasons. One, a report that suggested that the Organization of Petroleum Exporting Countries (OPEC) may be willing to talk to non-OPEC producers about curbing output and stabilizing prices. Two, data from the U.S Energy Information Administration (EIA) indicating a drop in oil production. A key factor in oil price volatility is the apparent “price war” between OPEC and United States ‘frackers” who are able to produce oil at cheaper price by utilizing hydraulic fracturing – a method of releasing hydrocarbons from shale rock by pumping water, chemicals and sand underground.

Shale oil represents a significant threat to the market share of OPEC oil producers to which Nigeria belongs. For instance, the US used to be a significant buyer of Nigeria’s crude oil. Now not a litre of Nigeria’s crude oil is exported to the US forcing the country to begin to compete for buyers in Asia and other saturated markets. Last month, there were reports of large stock of unsold crude inventory. Currently real growth in Nigeria’s oil sector has slowed by 6.79 per cent year-on-year with oil production output in Q2 2015 7.5 per cent lower relative to the corresponding quarter in 2014.

In response to this threat, OPEC has favored a policy of maintaining current production rates and defending market share rather than cut output to prop up prices. This is aimed at forcing US drillers to cut production in order to balance the market. In July, Saudi Arabia – the world’s number one oil exporter – exceeded its quota of 30 million barrels per day last month. The consequence of this kind of strategy in a situation of global economic downturn which manifests in lowered demand for crude oil due to slow industrial activity is a crash in crude oil price.

Whether OPEC will actually now carry out a review of its production quota is very debatable. With a number of the OPEC member countries already facing economic crises as a result of the low crude prices, the cartel may at some point consider scaling back output. In all likelihood, a decision would not be taken until the cartel meets by December 4. In the meantime however, the oil glut continues in the midst of sharply falling demand raising the possibility of oil price continuing its decline.

Particularly, on-going economic slowdown in China, whose impact is yet to be fully felt, promises to depress oil price further. Not to be underestimated is Iran whose oil could glut the already over-glutted market once the international sanctions which had hitherto curbed its export are lifted on the basis of a recently negotiated nuclear deal. The consequence will be increased economic crises for Nigeria and other countries on the continent whose economies are not only exposed to China through trade and commodity export but also through China’s investment in infrastructures. A recent note by Fathom Consulting highlighted “a 40 per cent year-on-year drop in Chinese imports from Africa for July”.

Monetary Policies

Compared to 2008 when crude oil price also crashed, Nigeria has entered into this crisis on a much weakened position. At the time of the crash in 2008, government oil savings account – the ECA – stood at $21 billion. This time around, oil savings stands at around $2 billion. Reduced oil savings means Nigeria has little to weather the storm including protecting the naira. Over the last 7 years of high crude oil price, oil savings were routinely looted as states and federal government fought for a share. That over 18 states went bankrupt within the first nine months of the oil price decline gives an indication of how much looting of the oil bonanza they were also involved in. Both the state government and the federal government are equally guilty of the mismanagement of the economy and should be held responsible for the current crisis.

Even from the point of view of the defenders of the system, government response to the crisis leaves little to be desired. The absence of a substantive finance minister as the new President still delays in forming a cabinet means there are no precise fiscal policies. The CBN’s monetary measures (which largely consist of managing liquidity in the system and the exchange rate) are as doomed as a sailor navigating a big storm in a small boat. Pegged artificially at N197 to a dollar, the naira is clearly overvalued making exports too dear. However the alternative of allowing the naira to come down to its real value will severely hurt local manufacturers who rely on import of raw materials and equipments for production.

While monetary measures have been unable to fundamentally change the situation, they also add new elements of volatility into the already troubled economy. A case in point is the prohibition of about 41 items from accessing foreign exchange through the CBN or commercial banks in order to bring down pressure on the naira and encourage local production of those items. For some of those items like poultry, cement and rice where sufficient local production capacity had been exhibited, it is quite possible that the restriction might do the magic. However in case of items which require heavy machinery and industry, their prohibition would not necessarily stimulate local production but ensure that their importation continues anyway and that they become pricey. Some of the prohibited items are also components required by some manufacturers. Difficulty in procuring these items would add to the crisis rocking the manufacturing sector.

Some of the items on the list are textiles, woven fabrics, clothes, steel pipes, galvanized sheets, glass and glass ware, tiles-vitrified and ceramic etc. In the 80s, Nigeria’s textile sector employed about a million workers. Today, it employs less than 25, 000. Cheap import from China now satisfies most of Nigeria’s textile needs. Without improvement in the electricity sector and other categories of public infrastructures that can ensure cheap manufacturing, it is unlikely that this sector can pick up either on the basis of public or private investment.

The local manufacturing sector upon which the CBN’s strategy is staked is very weak. In the 2nd quarter of 2015, manufacturing sector experienced negative growth of -3.82 per cent. With electricity generation hovering around 4, 000 mega watts and interest rate on borrowed funds standing at 27 per cent, no serious industrial production is to be expected anytime soonest. Nigeria is import-dependent for the simple reason that imported goods are cheaper than those produced locally. The weakness of the manufacturing sector however reflects the weakness of capitalism in Nigeria. The local capitalists are content to either depend on patronage from government through contracts or invest in such areas as cement, quarrying, food processing, etc that do not bring them into direct strong competition with foreign capital.

An Alternative to Crisis

What confounds the CBN strategists is the obvious absurdity of a country that spends N1.3 trillion annually to import goods that could be manufactured locally. To be certain, Nigeria’s economy will continue to be volatile and unstable unless this equation is reversed. The massive foreign exchange reserves that as a rule must be kept is to guarantee imports of goods and services (including refined petroleum products) by ensuring enough amount of dollars are available in the economy for daily import needs. But no measure that continues to place Nigeria within the confines of the capitalist economic relation will be enough to fundamentally resolve this paradox or pull the country out of the economic decline.

The key question is what set of policies can effectively bring an economy out of a decline. For ruling classes everywhere and including here in Nigeria, austerity appears to be the immediate response. This will consist of bringing down wages, retrenchment, more and more privatization and cuts in spending on education, healthcare and other social services. There are indications that to raise revenue, government is planning to increase the Value Added Tax (VAT) from 5 per cent to 10 per cent. But austerity measures while they unload the consequence of the economic crisis on workers and poor masses that did not benefit from the boom also risk deepening the crisis or preventing an early recovery by depressing purchasing power.

From the new Buhari government whose popularity rating is still very high, brutal austerity measures (retrenchment, layoffs etc) targeted at public sector workers especially would most likely be dressed up as part of the overall anti-corruption campaign and efforts to curb waste in order to blackmail labour. For instance, just as labour is trying to raise the call for a review of the minimum wage law which was last increased 5 years ago to N18, 000 monthly, the federal government has directed all ministries not to enter into any new negotiations with labour and that future negotiations with labour would have to pass through presidential approval. The impression already being created is that workers’ “unreasonable demands” are parts of the wastes that would have to be curbed to rebalance the economy! The implication of this is grave for many agreements with trade unions in the education sector for instance that are already due for negotiation. In Oyo state, the government while taking the correct step of stopping the state’s annual sponsorship of thousands on holy pilgrimage to Mecca has also decided to attack the poorest of the poor by stopping payment of West African Senior Secondary School Certificate Examination (WASSCE) for secondary school students and has instead introduced so-called development levy.

The labour movement must not accept austerity as the only answer to the crisis. The answer that will prove most effective is an alternative economic and political agenda that ends capitalism and the imperialist relation of dependence of the economy. For instance, despite the economic crisis, lawmakers of the defunct 7th Assembly took a massive N2.4 billion as severance pay. The current set of lawmakers are making between N6bn to N8 billion annually as salaries aside allowances. Reduction of salaries has now become a comical show of a sort after President Buhari and his Vice unilaterally announced a 50 per cent reduction in their pay. The pay cut notwithstanding, all political office holders still earn many times more than an average worker.

Labour must show that it is spiteful of the rest of Nigerians for political office holders to unilaterally determine how much they are willing to shed off their swollen pay while demanding sacrifice from everyone because of the economic crisis. In response, labour in addition to raising a new demand for increase in the minimum wage to lift workers out of deepening poverty caused by the economic crisis must also demand that the minimum wage law which guides the pay and emolument of workers should also guide that of all political office holders with the aim of ensuring that no political office holder earns more than the annual wage of the highest paid worker.

To the demand for a raise in the minimum wage, government officials would most certainly reply that this is impossible in the midst of revenue decline. But this is not true! Even at the current price of around $47, Nigeria stands a chance of making enormous billions monthly from crude oil sales that could be plowed into revamping the economy, creating jobs and improving the standard of living of the mass majority. But this is only possible especially on a sustained basis if the oil sector is publicly owned and democratically managed. On the current capitalist basis, a huge chunk of the oil sector is owned and run by International Oil Companies (IOCs) and the local oil companies and marketers. This means that in times of boom or burst, Nigeria is a perpetual loser and the IOCs and oil marketers’ gainers. Cleaning the NNPC of corruption as President Buhari has vowed to do while the control of the oil sector remain in the hands of a cabal of oil majors and marketers will not fundamentally solve the problem.

Taking the oil sector into public ownership and democratic control and management are amongst the first necessary steps to begin to confront the economic decline. However, this is only possible under a working people’s government which with a socialist economic plan can ensure that the economy is fully set on the path of recovery that benefits the mass majority and not just the ruling elite. The major step towards such a government is the formation of a mass working people’s party that could defeat all the big capitalist parties. This is why we have consistently called on the leadership of labour movement to initiate the process for the formation of such party.