Monday, October 20, 2008

One thing that has accompanied the global financial crisis has been a significant drop in the price of oil per barrel. It has fallen by 50% in the last 3 months. While some quietly argue that this was a ploy by the Bush administration to help Republicans win the upcoming election, it is more likely a sign that speculators and serious investors are putting their money elsewhere - gold, for instance, or letting it sit in a bank account.

These uncertain economic times have forced the Nigerian government to not only announce major budgetary cuts but to also announce that the government will need to look beyond oil for revenue and that

"There may be a need to intervene to balance the market, if the price slide seemingly predicted on demand and over-supply continues..."
This follows the recent news from Soludo at the World Bank meetings that the Excess Crude Fund, a savings account that contained the windfall from oil earnings, is now depleted. And, this action may have been a reaction to the advise given by Ngozi Okonjo-Iweala of the World bank. She specifically stated on the 15th of October that Nigeria needed to be "prudent with [its] budget."
A few Nigerian banks have failed in recent weeks and according to a complaint from the Senate, the Central Bank was unable to promptly pay depositors of the failed banks. Additionaly, the federal government recently announced that due to insufficient funds, road projects will be financed with bonds.

These and other startling issues would suggest cause for alarm, however, Nigeria has approximately $64 billion stashed away in foreign reserves. That is money that can be used by the government if and when necessary. I am happy to see that Nigeria will be forced to not rely on oil wealth. If Okonjo-Iweala is correct that commodity prices will fall 20-25% in the coming year, then it is crucial for Nigeria to indeed 'tighten its belt' and seek alternative sources of income to fund the many projects Nigeria needs. We cannot continue to spend oil wealth without a careful strategy.

It seems that the federal government is preparing the nation to 'cut its coat according to its size'. That is a good ethic to encourage, especially as the financial crisis has affected every single person from the richest to the poorest. But as the federal government encourages this mantra, it would be a wonderful example if top ranking officials like the President, the heads of the Nationa Assembly and others took a pay cut. Afterall, their peers in Cote D'Ivoire did that months ago. Nigerian legislators increased their pay by over 100% in August, and considering that their constituents never had that good fortune and are faced with extreme hardship in these trying imes, the least 'our representatives' can do is return to pre-increase pay.

'Our representatives' must lead the charge in tightening their own belts now that oil wealth is dwindling. Members of the National Assembly should unilaterally forego their various allowances like the newspaper, hardship and constituency allowances. Additionally, the budget to remodel the Senate Speaker's residence, the same issue that led to the downfall of Patricia Etteh, should not just be cut in half as is now the case, but should be scrapped all together. Speaker Dimeji Bankole can manage without remodeling that house which continues to be source of ire. It has been almost a year since he moved in to the house and there is no rush to fix it up, is there?

Given that our oil wells will be empty in approximately 43 years, this financial crisis gives Yardy the opportunity to transform Nigeria by revitaling the agriculture sector and expanding the nation's sources of income so that we no longer have to rely on oil for revenue. Imagine what that accomplishment would mean for Nigeria's future and Yardy's legacy. I only hope that good things will come out of all this.

Further Reading:
- Should Yar'Adua Get A Pay Raise?
- How To Become A Millionaire
- Look To The Ivory Coast For Inspiration
- Excess Crude Fund Depleted
- Nigeria's Sovereign Wealth Fund
- No Longer King of Crude
- Nigeria's Oil Expiration Date Draws Near

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Saheed said...

Not to be derogatory, but these our leaders with PPP need to fall back, retire and let the younger generation take over. Its not the solution but at least we have some sense and our youthful exuberance, creativity and courage allows us stand up to corrupt officials and contractors looting us. Governors dashing chieves fleets of cars etc and someone has the audacity to put it in the papers....

N.I.M.M.O said...

No, Nigeria is not going broke.

The banks being referred to were the ones who failed before the consolidation. They have some serious unfinished business to the tune
of about 125 billion Naira. This is more of a 'brought forward' thing. Not current.

Its also not the CBN's job to pay depositors. thats the NDIC's job but even in this case the money could not be accounted for by the managements of the failed banks.

Something not too diferrent from what is happening to AIG, Lehman Bros and others in the US. Like John Milton Keynes warned several years ago '... greed is universal ..'

And, the 'oil wealth' is not going anywhere.

Prices will drop alright but na today? I think many Nigerians who are even praying for the oil to dry up today so that Nigeria can focus on its other many blessings.

Puh-leeeeze, let nobody ask Nigerians to 'tighten-their-belts' or 'cut-their-coats-according-to-their-cloth' because thats all we have been doing for the last twenty years or so. If anything, let it start from the rulership as you suggest.

Anonymous said...

The oil wealth has gone since the value depends on future income, hence the knee-jerk reaction to the propaganda budget cut news. OPEC is a problem but that is a rant for another time as oil drops 50% of its $140 August peak. The Chinese economy growth rate slows and our oil production capacity is constrained, all of these equals NO CASH.

The above are reasons we must wake up to spending on important projects. Petty squabbling over cars and cheap household goods is demeaning and must stop. Let us bring on the huge projects that will create jobs and turn lives around.

If this government 'cut its coat according to its size', it might as well cut its own throat. Global financial crisis wiped out over $100Tn in days. What is wrong with Nigeria spending the same amount over X years? The politicians may steal as much as they want, but there will be enough to stimulate the economy (via jobs) which means we will be able to repay all. Anything else is prolonging the death of a nation.

Naapali said...

I am not surprised by these developments they are only to be expected. For years I have been wringing my hands and banging my head on the wall at Nigeria's leaderships lack of foresight or ability to plan based on current trends/future projections.

The Abu Dhabi, Dubai, Saudi Arabia, Kuwait and even Qatar have come to terms with the fact that they will run out of oil. States like Dubai and Abu Dhabi have so heavily invested their rewards from petroleum that they now depend on it for only 20-40% of their budgetary spending (Financial Times 2008). They also have based their budgets on conservative estimates of the price of crude (at roughly $64/barrel). They have instead become cash and asset rich in preparation for a future without oil. They have built up infrastructure to rival any world capital to lure business travel and financial markets.

Nigeria is not a gulf state and our population demands some different approaches to oil revenues. However, it does not take a genius to realize that Western manufacturers are going to need another supplier of cheap labor and also high tech support as costs rise in China and India. Nigeria with a young population, largely English speaking, access to coastal waterways would be an ideal target for both manufacturing and high tech support. But for either to happen infrastructure including financial institutions, telecommunication, power, roads and ports would be essential. We have not taken any steps to position ourselves for this. The 'surplus' cash that came from the boom in commodities and oil would have been better spent gearing up for this and not for the pay raises our leaders have yet again enriched themselves with.

Dojaa said...

We really need to run out of oil fast; so we can hopefully find other means of generating wealth.

Anonymous said...

Charity begins at home. Our leaders must be ready to make huge sacrifices for our nation's development and its time to develop agriculture.

I need to interview you Sydelle, pls email me at tadonline@gmail.com so I can have a medium of sending the questions to you

bumight said...

I was reading on one of the nigerian newspapers online that the federal budget is determined by the price of oil. At that point, i put my hands on my head and exclaimed a little "mo daran!" for my country. cos i could just imagine what would happen to the country when the price of oil really begins to dwindle.

i also read about a fellow african country that came to get palm kernell seeds from Nigeria, and is now one of the top 3 exporters of palm oil.
Our leaders seriously lack forsight, actually, i dont think that country is used to the idea of forsight anyways. why is anybody approving a 100% salary increase for themselves?

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