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Published On: Thu, Dec 11th, 2014

Falling oil prices: Why FG must work beyond mere assurances

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diezani-allison-maduekeBy Etuka Sunday

Since the announcement of the drop in global oil prices, there have been assurances from the federal government and indeed economic experts around the corridor of power on how Nigeria’s economy would blossom even in the face of such global reality.

The recent one was the one made by President Goodluck Jonathan last week when a delegation of multinational industrial giant, General Electric (GE), led by its Vice Chairman and CEO, Mr John Rice, paid him a courtesy visit at the Presidential Villa.

Jonathan while speaking assured Nigerians and indeed foreign investors that the Nigerian economy would remain stable despite the drop in global oil prices.

Although no precise solutions were advanced by the President in his speech but he said, the Federal Government would do everything possible to maintain domestic economic stability, and urged the company to maintain its confidence in the country.

To quote him directly, he said, “We promise our people that even with the drop in oil prices, the economy will be stable. I urge you to maintain the confidence you have in this country before the oil price drop, and even expect better management from us. Sometimes, it is when you are challenged that you do better than when everything looks good.

So, I assure you, other investors in this country and all Nigerians that the government will do everything necessary to stabilise the economy and that the drop in the price of crude oil will not create so much distortion in our economy,” he said.

Although a lot of measures had been announced by the federal government in anticipation to cushion the effect of the falling oil prices on Nigeria’s economy, but experts saw the measures as temporary solutions to the ugly reality of the global challenge.

The federal government through the Minister of Finance and the Co-ordinating Minister for the Economy, Dr Ngozi Okonjo-Iweala, announced austerity measures aimed at cushioning its impact on the economy.

The measures was to see Nigerians paying tax on luxury goods, reduction in public expenditures and international travels by public servants, prudence and low budget benchmark by the National Assembly to encourage more savings.

“After a careful analysis of the situation, the economic team approved a $5 per barrel reduction in the 2015 budget benchmark price for oil from $78 to $73 per barrel,” she said.

According to her, the measures were designed to boost non-oil revenues further, plug loopholes and waste and cut unnecessary expenditures in order to cope with the situation.

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.

“We are not talking about (cutting) salaries and benefits. We are talking of training and travels and these will be only for critical and essential items which will be pre-approved by the Head of Service and the Director-General of the Budget Office and then if someone invites you for overseas course, you can go provided they pay for your training and your stay and you have to furnish evidence that they are paying before you will be allowed.

“The purpose of this is to tell you what we are doing and this team is calm and will be effective and we are working with the monetary policy authorities and together we will manage the economy in a transparent manner so that people need not have any fear.

“Panic is not a strategy. It’s important that our strategies are based on facts and a clear understanding of both the strengths of the economy and the challenges posed by the drop in oil prices which is currently at $79 for our premium Bonny Light Crude.

“The drop in oil prices is a serious challenge which we must confront as a country. We must be prepared to make sacrifices where necessary.

“But we should also not forget that we retain some important advantages such as a broad economic base driven by the private sector and anchored on sound policies.

“Our strategy is to continue to strengthen the sectors that drive growth such as agriculture and housing while reducing waste with a renewed focus on prudence.”

She disclosed that the Federal Government would focus more on increasing non-oil revenues.

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

“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.”

It doesn’t just stopped there, the Central Bank of Nigeria (CBN), after its Monetary Policy Committee meeting announced policy measures that would help reduced the effect of the falling oil prices on the economy as well.

The CBN’s Governor, Mr Godwin Emefiele shortly after the meeting announced that the MPR was hiked 100 basis points from 12 percent to 13 percent. The private sector CRR was hiked 500 bps from 15 percent to 20 percent. The RDAS mid-rate was moved to 168 from 155, and the band around it widened to +/-5 percent.

In as much as these measures are well tailored theoretically, they must be followed with actions-determined efforts that would save Nigeria from impending economic doom.

Again, it is agreed that much attention should be given to the non-oil sector like agriculture, however, that may not be fast in replacing the oil revenue. It may take years before that materialises. Therefore, as a suggestion, corruption and money- laundering should be promptly tackled.

Additionally, the country should be preparing for the worst next year (2015) because major producers may slash their drilling and exploration budget by more than 20% which may slow global economic growth.

 

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