…NNPC’s Remittances At Record Lows
…193m Barrels of Crude Oil Stolen in 11 Months
…$3.27bn Lost to Oil Thieves, Vandals in 14 Months
…Losses Make it Harder For CBN to Defend the Naira
…Corrupt Fuel Subsidy Bill May Cross $10bn in 2022
…Rising Debt Passes N40trn
…Debt Servicing Could Gulp 90 Percent of Nation’s Revenue
…MAN, Analysts Proffer Way Out of Economic Crisis
April 11, (THEWILL) – With the drumbeats of politics beginning to sway the Nigerian environment, the majority of the citizens seem distracted from the impending acceleration in economic hardship while the nation bleeds. The hemorrhage, which worsens by the day, leaves no room for a guesswork that Nigeria is tilting towards bankruptcy. And little suggests that an effective remedy is in sight. It may not be an exaggeration to state, at this stage, that Nigeria is broke!
The revenue from oil, the pillar of her economic existence, is declining at a frightening rate. National debt is unsustainably high and the government is borrowing more. Furthermore, expenditure, waste, corruption, mismanagement and looting of our common wealth continue unabated as other macroeconomic fundamentals point to a possible collapse of the economy.
Road to Perdition
Ten years ago, Nigeria earned $62.9 billion (about N12.5 trillion at that time) as revenue from the oil and gas sector, with daily oil production hovering between 1.8 and 2 million barrels per day in 2012. Nigeria’s crude oil production has declined to an average of 1.3 million barrels per day as at date, meaning that oil revenue has dropped significantly. The implications are obvious – shrink in government revenue with ripple effects on the wider economy.
A report published by the Central Bank of Nigeria (CBN) showed that oil revenue for 10 months to October 2021 stood at N4.03 trillion, representing a very marginal increase of 0.2 per cent from the N4.02 trillion recorded in the corresponding period of 2020, even though the most part of 2020 was constrained by COVID-19-induced shut-ins and shutdowns.
According to the CBN report, oil revenue into the Federation Account, which comprises crude oil and gas exports, petroleum profit tax (PPT)/royalties and domestic oil and gas sales, has been on a steady decline.
The report further indicated that the relative stagnation in oil revenue during the 10-month period was occasioned by 62 per cent, year-on-year, decline in crude oil and gas exports and 10 per cent, year-on-year, decline in domestic oil and gas sales, which cancelled the impact of 13 per cent, year-on-year, increase in revenue from PPT and royalties. It noted that crude oil and gas export revenue recorded a huge decline to N125.4 billion in 10 months from N326.05 billion in the preceding year.
A frightening twist is the rising crude oil theft which has assumed a worrying dimension in the industry. Nigeria recorded 193 million barrels of crude oil deficit in 11 months in 2021, resulting in a production drop to 441 million barrels of a projected 635 million barrels of crude during the period. Additionally, only 12 of the country’s 53 oil rigs were found to be active.
At a projected 1.86 million barrels daily oil production in the country’s 2021 budget, Nigeria recorded a huge deficit of almost 200 million barrels in the first 11 months of the year, due to the rising cases of crude oil theft, ageing infrastructure, challenges associated with host communities, under-investment and poor security in the waterways. Figures from the Nigerian Upstream Regulatory Petroleum Commission (NURPC) indicated that while Nigeria was expected to pump approximately 635 million barrels of oil by November 2021, it struggled to produce only 441 million barrels in the period.
Many oil companies are reporting huge losses, sometimes up to 80 per cent of production in the pipelines. According to reports, when they pump through the pipelines, they only get about 20 percent of product and the rest lost to pipeline breaches and organised theft. Incidentally, the 20 percent hardly covers the cost of production. This results in huge losses while the cost of funds mounts.
Some of the operators identified security as a core issue for the oil companies as product losses through the pipelines are now so massive that it is affecting their bottomline and the country’s revenue projection from crude oil export. “Huge quantities of products are daily stolen by individuals and organised cartels of criminals. This has an impact on our existential imperative,” said Ferdinand Alao, an oil and gas financial expert.
Helpless situation?
The Federal Government recently raised the alarm over the rising rate of crude oil theft in the Niger Delta, disclosing that about $3.27 billion worth of oil had been lost to vandalism and theft in the past 14 months. In a presentation at a stakeholders’ engagement in Abuja last month, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) said the government was extremely worried about the huge loss of oil revenue to vandals. The Chief Executive of NUPRC, Gbenga Komolafe, who disclosed this, said that much of the crude oil losses came from Bonny Terminal Network, Forcados Terminal Network and Brass Terminal Network – the nation’s major export oil channels.
He listed factors aiding the criminal activities to include economic challenges, inadequate security, poor surveillance, poor community engagements, exposed facilities and stakeholders’ compromises, stressing that due to the high level of theft, the country had been unable to meet its OPEC production quota.
When good becomes bad
Nigeria’s situation is worsened by the fact that the rising crude oil price in the international market has not translated into any benefit to the country. This point was highlighted by the World Bank’s Country Director for Nigeria, Shubham Chaudhuri, earlier in the year when he said that rising oil prices might have a negative impact on Nigeria’s revenues due to the huge sum of money spent on the importation of refined petroleum products and payment of fuel subsidy.
“Ironically, Nigeria is at a point now where rising oil prices might not be a good thing because, although oil production might go up and crude oil revenue may increase, which in some sense is a good thing, the fiscal cost of PMS subsidy and gasoline subsidy will also go up,” Chaudhuri said at the Deloitte National Economic Outlook for 2022 in Abuja.
Recently, oil prices have exceeded the $100 per barrel mark, a price level not seen since 2014. “It is not guaranteed. We hope it will have a positive impact. It will help the broader economy, but in terms of the direct impact on the fiscal situation or the balance of payment, it is a bit more complicated,” the World Bank official said. He explained that it is hard to come up with an exact estimate, but maintained that further oil price increase might have a net negative impact on the federation’s revenues.
The subsidy imbroglio
Nigeria spent N1.03 trillion on fuel subsidy in 2021, according to data from the NNPC. The World Bank projects that the country could end up spending between N2.5 trillion and N3 trillion on PMS subsidy in 2022. The Federal Government is seeking the National Assembly’s approval of a N4 trillion supplementary budget to fund fuel subsidy in 2022. There are fears that this will escalate the 2022 fiscal deficit beyond N10 trillion. With the nation’s debt stock hitting over N40 trillion, there are fears that the nation might be using about 90 percent of its revenue to service debts. This leaves a meagre revenue for capital expenditure and other recurrent expenditures.
With the rising government debt, there is palpable fear in fiscal and monetary policy analysts’ circles that the country could soon really become broke and be unable to meet its obligations. Concerns have also been expressed that the nation may become stuck in a debt quagmire in the event of a major currency crisis or face foreign exchange risks that could double the current debt profile. This will spell disaster for the citizens, who are already at the trough of the misery index curve, as the high cost of living has worsened in recent times.
But what is Nigeria’s actual daily petrol consumption on which the massive oil subsidy is paid? The Major Oil Marketers Association of Nigeria (MOMAN) pegs Nigeria’s Premium Motor Spirit (PMS) consumption at an average of 14.2 million litres per day. This figure appears to be at variance with the claims of the government, which had on different occasions pegged the country’s monthly petrol consumption at 50 million, 60 million, and over 100 million litres per day.
The Managing Director/CEO, Taurus Oil and Gas Limited, Dr Nnaemeka Obiaraeri, a banking and oil and gas industry expert, in an interview with THEWILL, disagrees with the level of domestic petrol consumption that the government claims. He argues that no empirical evidence supports the claim of such a huge domestic consumption of petrol, even when the volume that is smuggled out is taken into account.
He said: “The refineries have not been working since 1999. Yet, they tell us we consume 103 million litres of PMS (premium motor spirit) per day and they will blame smugglers. How can we believe such stories? Look at the daily domestic demand of all our West Africa neighbours.
“Assuming these countries are so unwise that they cannot even import their own petroleum products, assuming they depend 100 percent on smuggled petrol from Nigeria, which is not true, they would not consume the level of petrol products that are ascribed to them.
“Let us also assume that these neighbouring countries are buying from or depend solely on Nigeria, which is not true. If you add their 8.6 million litres total consumption per day to what the US EIA record says is our consumption – about 39 million litres per day, that would mean that we and our neighbours are consuming about 46 million litres. So, where are the remaining 57 million litres that NNPC says are being smuggled?
“To smuggle 57 million litres of PMS every day, will require about 1,800 12.5 feet long trucks. If you line up those trucks at a time on the road bumper to bumper, they will cover a 22 kilometre stretch of road. How can trucks move in a convoy that covers 22 kilometres without security agents – Police, Army, Air Force and Navy –seeing it?”
Walking a Tightrope
As things stand, Nigeria can no longer accommodate the huge amount of money that it loses through waste, mismanagement, corruption and outright stealing. The NNPC is beginning to make zero remittance to the Federation Accounts Allocation Committee (FAAC). For the first time in eight months, the Nigerian National Petroleum Company (NNPC) Limited failed to remit a kobo to the Federation Account in January 2022, despite the rising international prices of oil. That is a bad sign.
Data showed that despite making an average N52.3 billion daily, given oil price averaged at $90 per barrel and also a slight improvement in oil exports of 1.3 million barrels per day in that month, NNPC said it had no money. It was also revealed that a whopping N210.38 billion was spent on petrol subsidies in January. What this means is that in one year (February 2021- January 2022) almost N1.8 trillion went into subsidy payment.
“In fact, it is more likely that zero remittance could be experienced in the months ahead given the challenge of occasional fuel scarcity, bad fuel importation and oil price now above $100 making the cost of importation more expensive. The government is most likely to witness continued dwindling remittance to FAAC,” said Mike Ekemor, a financial analyst.
The three levels of government shared N675.946 billion in FAAC revenue in December for the month of November, while it shared N699.82 billion in January for December 2021. However, overall payments shared in February 2022 dropped drastically to N574.66 billion – a four-year low, increasing worries about states’ capacity to fulfil their existing financial commitments. Already, many states are either owing a backlog of salaries or have slashed workers’ salaries substantially, making life more difficult for the people.
Incidentally, spokespersons of the relevant authorities contacted for comment did not respond. Calls made to the Group General Manager, Public Affairs, NNPC, Garba Deen Muhammad, were not successful as his mobile phone indicated it was switched off. Messages sent through SMS and WhatsApp were not responded to. The same applies to the Director, Press, Federal Ministry of Finance, Mrs Philo Osodin, and the Director, Corporate Communications, CBN, Osita Nwanisobi.
Social Implications
Given the worsened insecurity in the country that has disrupted farming and movement of goods and services combined with the high rate of youth unemployment, the looming bankruptcy would only deepen hunger, fuel crime rates and mutual mistrust among Nigerians. The 50-Day ASUU-FG face-off keeps frustrated students at homes that are currently in darkness due to the collapsed national grid. This is also an indication of coming shut down in other sectors due to inability of the government to fulfil its obligations.
Depleting Foreign Reserve
The nation’s external reserve is not spared. Nigeria’s gross external reserves which stood at US$43.85 billion at 31st December 2021 decreased to US$39.86 billion in February before dipping further to US$39.55 billion in March 2022. That means many companies will not be able to import machinery and raw materials for domestic production, leading to scarcity, high cost of goods and services and more hardship for the people.
To contain the depletion of the nation’s reserves, the Central Bank of Nigeria has hinted that it would stop foreign exchange sales to deposit money banks (DMBs) amid steep dwindling forex inflow. In reaction the banks have commenced a review of the usage of their naira card for international transactions from $100 to as low as $20 per month. The local currency, the Naira, will continue to decline in value at the foreign exchange market, now about N590/$1 as against the interbank rate of N419/$1.
Analysts explain that the development reflects prevailing economic realities bordering on Nigeria’s revenue crisis as oil proceeds dwindle, putting pressure on the nation’s external reserves. The foreign exchange shortage will affect the ability of Nigerians to pay for foreign goods and services including education, healthcare. The high cost of imported equipment and raw material will be passed to the final consumers as inflation rate surges.
The government is also struggling to stay afloat amid actions and inactions which suggest that Nigerians possess inelastic capacity, hardship, pains and misery. Nigerians should brace up for the impending bankruptcy.
It is obvious that cutting wasteful expenditure and plugging avenues of revenue leakages do not seem a priority to the government. In its wisdom, the government believes that the tax loop should continue to be widened. If practicable, Nigeria’s 200 million people should be dragged into the tax net, and have the fiscal hose plugged into their body to suck more taxes from their blood. The government maintains that ‘Revenue’ is its problem, not the high cost of debt servicing.
Early in the year, Agusto and Co, a foremost credit rating agency in Nigeria, projected that the country’s debt-to-revenue ratio would cross the 80 percent mark in 2022 following the build up to the general election in 2023. In their projections for 2022, the agency stated that in 2022, the major themes that will dominate Nigeria’s economic landscape will be politics, the management of the fiscal deficit, foreign exchange policy of the Central Bank and changes in prices and economic growth (or the lack of it).The International Monetary Fund (IMF) said last February that the Federal Government could spend as much as 92.6 percent of its revenue on debt servicing this year.
With attention focused on raising more tax, the challenge gets more complex. Government revenue officials and consultants become more daring in their crude approach to revenue drive. How the government plans to expand the tax window in the midst of a dwindling economic fortune is one paradox that stares everyone. Income and tax revenue do not grow under a lean economic environment.
Additionally, the cost of diesel and aviation fuel has shot up to about N700 per litre. Petrol sells above the “official” pump price in different parts of the country resulting in an increase in transport fare which is borne by commuters and final consumer of goods. The rising cost of transportation contributed more to the high inflation rate of 15.7 percent recorded in February 2022, from 15.6 percent in January, according to the National Bureau of Statistics.
The Joint Admissions and Matriculation Board, JAMB, has raised its University Tertiary Matriculation Examination, UTME, mock examination service charge from N600 to N1,000 over high diesel cost. This suggests that no sector is spared.
The Manufacturers Association of Nigeria has sent a distress call seeking the Federal Government’s intervention in the high cost of diesel.
“It is getting extremely difficult to produce and I don’t know how we are going to cope because 70 percent of industries are running on diesel, there is no light. It is a difficult thing ensuring production at this time, as diesel has gone up to N720 and N730 per litre. We are having 30 percent of what it used to be, whereas the disposable income of people is not increasing and the costs of products are going up”, Chairman of the Manufacturers Association of Nigeria (MAN), Lanre Popoola, lamented.
The economic consequences are obvious: high cost of production, low capacity, low consumption, loss of jobs, loss of tax revenue, closure of factories and other serious outcomes. The rising cost of petrol importation brings an additional burden to the economy. Nigeria, Africa’s largest oil producer, saw its petrol import bill hit an all-time high of N3.96 trillion in 2021. The amount spent on the importation of petrol in 2021 jumped from N2.01 trillion according to data from the NBS. The cost of importing petrol last year is more than 40 times larger than the entire 2021 budget of N94.4 billion meant to pay for free universal basic education. Furthermore, analysis of the trend showed that Nigeria’s petrol subsidy could surpass budgeted N3.36 trillion oil revenue.Nigeria’s oil production is also falling below the 2.2 million barrel per day mark it used to record.
The Federal Government has confirmed that it terminated electricity subsidy and that fuel subsidy will eventually be totally withdrawn. The living misery of Nigerian households and businesses is compounded by these factors as cost of living gets out of reach. The NBS reports showed that the cost of food has been rising astronomically across the states due to high transportation cost and insecurity.
The current war between Russia and Ukraine, the world’s largest producers and exporters of wheat has sent shivers in the spines of Nigerian businesses. Obiarari told THEWILL that the revenue crisis could be addressed through cutting costs and reducing waste. He urged the government to fully implement the Petroleum Industry Act which provides for full privatisation of the NNPC.
“You cannot be carrying a loss-making venture and still want to make profit. Let them privatise the refineries. By privatising those refineries NNPC will be eliminating over N150 billion loss from their operations”, he said.
Political Economist, Lawyer and Visiting Fellow at the London School of Economics, Olu Fasan, in a chat with THEWILL said the cost of governance must be drastically cut down and the economy effectively diversified to attain the level of productivity that would help the citizens absorb the shock of the government’s fast dwindling revenue.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
