{"id":2650,"date":"2020-05-11T22:28:52","date_gmt":"2020-05-11T22:28:52","guid":{"rendered":"http:\/\/vor.org.ng\/?p=1163"},"modified":"2022-08-14T08:26:05","modified_gmt":"2022-08-14T08:26:05","slug":"escaping-the-looming-abyss-i","status":"publish","type":"post","link":"http:\/\/ictnetworldltd.com\/newvor\/2020\/05\/11\/escaping-the-looming-abyss-i\/","title":{"rendered":"Escaping the Looming Abyss (I)"},"content":{"rendered":"

\u2018The\u00a0truth\u00a0is\u00a0incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is\u2019<\/i><\/b> \u2013 Winston Churchill<\/p>\n

As someone who has routinely warned about grave\u00a0dangers\u00a0if drastic changes were not made to Nigeria’s fiscal and monetary habits, I constantly carefully analysed and wrote on various risks factors\u00a0that were narrowing Nigeria’s window\u00a0 of making it out of over five decades of\u00a0its oil windfall with something more than gloom, doom and a sad memory of missed opportunities
\nThese risks ranged from\u00a0the demand-side challenges from alternative and renewable energy sources and electric cars to seemingly myriad issues on the supply side including the fracking and shale oil that has decimated Nigeria\u2019s crude exports to the US in particular. Lately (actually at different points over the last six years), the bemusing game of self-flagellation between Saudi Arabia and Russia to test the limits of global storage capacity by oversupply,\u00a0 offering discounts\u00a0 generally forcing a downward pressure on oil prices added an interesting dimension to these risks.
\nThree months ago,\u00a0my outlook for Nigeria’s\u00a0financial health was mostly as it had been over the last decade. My two main areas of concern were forex and the refined petroleum (downstream) sector, areas responsible for massive, but below the surface economic mismanagement and systemic leakages. I often hoped that:
\n1) If we could somehow realise that crude oil & its revenues are an ‘unearned’ seed that needs to be planted on the soil of complete downstream sector deregulation, we could harvest\u00a0complementary and supplementary sources of income, foreign exchange and development that would include :<\/p>\n

    \n
  1. A booming refining and petrochemical industry<\/li>\n
  2. Enough gas to end all power generation woes.<\/li>\n<\/ol>\n

    This, coupled with our cheap abundant & underutilised labour could make a Nigeria a competitive regional manufacturing hub.
    \n2) If we could curtail the relentless frittering\u00a0of the largely crude sourced foreign exchange on\u00a0economically unproductive things like\u00a0tourism, pilgrimages, subsidising foreign education for the children of\u00a0the elite\u00a0and channel this to economically productive agents and\u00a0activities,\u00a0then we will be able to grow the reserves,\u00a0and prevent the recurring trend of immediate pressure\u00a0 on the exchange rate,\u00a0whenever there is a sustained drop in crude prices.
    \nIn January and early February, Covid-19\u00a0seemed so far away\u00a0and much less of a threat than the Lassa fever which was affecting a few states in the country. It was hoped that our exposure would be limited to observing the effects on Cable news stories like we did for the previous MERS and SARS outbreaks in Asia.
    \nCovid-19 however rapidly triangulated its damaging tentacles on Nigeria\u2019s finances as national lockdowns\u00a0around the world exacerbated the impact\u00a0of supply gluts and\u00a0oil price wars. The drastically reduced demand\u00a0pushed crude prices into\u00a0negative territory,\u00a0suggesting a hardly ever seen ‘supply squeeze’ where seller will be willing to pay ‘buyers’ to take the product to save on things like holding\u00a0and storage costs of unsold crude. This also explains why 84 million barrels of Nigerian crude (over a month’s production) is reportedly floating at Sea with no buyers, as I pen these words.
    \nNaturally connected to the crude oil revenue drop has been the scarcity of foreign exchange and the\u00a0pressure on the naira exchange rate.\u00a0This is hardly surprising given the systemic weaknesses previously identified and the fact that oil revenues is said to account for about half of Government revenue and\u00a0 over 90% it’s foreign exchange.
    \nA less obvious impact of Covid-19\u00a0is its impact on alternative sources of Forex.\u00a0Remittances from Nigerians abroad is said to the about $20 billion annually and provide a number of economic benefits\u00a0including:
    \n–\u00a0\u00a0 an informal but substantial source of investments
    \n–\u00a0 a source of income and a crucial social net for millions
    \n–\u00a0\u00a0 an underrated, but substantial source of crucially needed foreign exchange, even if the CBN & a leading Western company\u00a0seemed determined to create an unnecessary Monopoly to\u00a0 capture these inflows.
    \nThese inflows have dwindled to a trickle\u00a0with the lockdowns and temporary loss of income affecting most of Europe and North America where\u00a0the diaspora remittances emanate.
    \nWe are now witnessing instant shocks to the street exchange rate with the Naira depreciating by as much as 30% in the last couple of weeks.
    \nI have\u00a0written in the past about the qualities that a leader or key public servant looking to make any kind of positive impact in the Nigerian public service must have. These include Capacity (intellectual, experience, will-power, result oriented etc),\u00a0Character and Courage. Based on this (especially the courage to stand up to political leadership when necessary), Nigeria’s financial leadership leaves some room for doubt.\u00a0 For starters, Mele Kyari (or the NNPC he heads) has no business\u00a0making pronouncements on key government fiscal and expense components like petroleum subsidies.\u00a0 Perhaps he was emboldened by absurd suggestions from an even more senior public official that NNPC and not Nigeria was paying for petroleum subsidies.
    \nThe country is now reduced to desperately begging for funds from organisations\u00a0that were themselves founded on unsustainable economic principles like the gold standard and fixed exchange rates between Western Countries. These organisations show no deep knowledge\u00a0or sensitivity\u00a0to the realities of a nation like Nigeria, and therefore cannot offer any substantially beneficial solutions. Forget the toga of economic advice, loan peddlers love desperate borrowers who will mortgage the house for a penny. After all, they are in the business of selling loans for a profit (i.e. for the benefit of shareholders or major subscribers & sometimes individual bonuses for the dealmakers)
    \nAny conditionality will naturally be geared towards protecting the interest of the lender (including guarantees for the repayments of the principal and interest)\u00a0 while the overall well-being\u00a0 of the obligor will naturally be a minor and distant consideration.<\/p>\n

    Nigeria has had at least four warnings over the last dozen years to prepare for this.\u00a0 Instances where crude prices dipped below $40 due to global trends, and events or where internal security and supply challenges almost halved crude output.\u00a0 A couple of attempts at genuine fiscal and downstream petroleum sector reforms were made, but each was clinically suppressed by elements within the NNPC and the Presidency (using labour union leaders and misguided activists as fronts).
    \nInterestingly, the steps recently suggested by Mele Kyari mirror the actions of the current Government\u2019s favourite punching bag Diezani Alinson-Madueke (which I condemned at the time as well)<\/a>, where the Government announces a reduction of domestic petrol prices following a global crash in oil prices, but does nothing about dismantling the structures that makes it possible for billions of dollars to be unaccounted for annually, making It impossible to develop a vibrant downstream domestic sector.
    \nThe Petroleum Support Fund and the Petroleum Equalisation fund have to be completely scrapped as a sign of any seriousness in ending the subsidy regime and limiting the Government\u2019s impact on this aspect of the Nigerian economy. NNPC (which ludicrously claims to be just another operator in the sector) and the PPPRA have no business setting the prices of petroleum products in the country. The PPPRA should either be scrapped or at become a unit of the Competition and Consumer Protection Commission. There is nothing different or special about petroleum products outside of the fact that the current import-focused subsidy regime makes it possible for billions to be withheld from the Federal account without any accountability.
    \nIf only for this reason only, NNPC must be barred from permanently operating in the downstream sector for good.
    \nIt is not surprising that one of the first major appointments of most Nigerian President in recent history is to appoint the GMD of NNPC. This is usually done well before a cabinet is even announced.
    \nProminent voices of reason have wondered if Nigeria needs a National Oil Company at all and have previously called for a complete dismantling of the NNPC proclaiming that, \u2018if Nigeria does not kill NNPC, NNPC will kill Nigeria\u2019. The USA, the largest crude producer in the world, the country with the most advanced oil and gas sector, and the country deriving the most benefit and revenues from its oil and gas sector, does not have an NOC. Protagonists will however counter with potential benefits that a well-run and transparent NOC should provide.
    \nEven if some justification can be claimed for the operation of an NOC in the Nigerian upstream sector, there is absolutely no reason for any continued participation in the downstream sector given the disastrous outcomes and results over the past decades. The only plausible reason has to be for continued access to billions of dollars that will never be accounted for through the \u2018losses\u2019 from refining operations and the \u2018deductions for subsidy reimbursement\u2019 from petroleum imports that cannot be adequately verified.
    \nBrief Profile of the author<\/strong>
    \n\"\"
    \nJide Olateju has had a passion for economic development and poverty reduction in Nigeria since his primary school days. This passion was a driving force behind his Graduate Degree in Development Economics from Yale University, and subsequent work on reform initiatives in Nigeria\u2019s Ministry of Finance.
    \nHe has worked with Arthur Andersen, SAC Capital Advisors, and was part of the team that launched Konga Online Shopping, where he served as the first Vice President overseeing Finance, Administration and Human Resources.
    \nHe currently provides strategic advice to Technology startups, and supports a work-study mentorship for gifted graduates of public secondary schools in Lagos State.<\/p>\n","protected":false},"excerpt":{"rendered":"

    \u2018The\u00a0truth\u00a0is\u00a0incontrovertible. 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