Nigeria’s Finance Minister, Zainab Ahmed, has said that the country would be cutting down on its 2020 budget due to a decline in crude oil prices. The announcement was made on Monday, March 9 in Abuja, the country’s capital, after a meeting with President Muhammadu Buhari.
The minister told newsmen that a committee would be formed to determine the size of the budget cut in the coming days. The committee would also be saddled with the responsibility of revisiting the budget benchmark crude oil price of $57 a barrel which was used to draft the 2020 budget.
The committee comprises Ahmed; the Minister of State for Petroleum (Timipre Silva); Mele Kyari, head of Nigerian National Petroleum Corporation (NNPC); and the Central Bank Governor (Godwin Emefiele).
Brent crude, one of the international benchmark for oil prices, was down by 19.5 percent at $36.43 a barrel by 15:49 (Nigerian time) on Monday. Experts have warned prices may dip further, due to a likely oil price war that may follow Russia’s disagreement with OPEC to cut production in a meeting in Vienna last week.
Following the collapse of talks between the world’s largest oil-producing nations, Saudi Arabia and Russia, global oil prices plunged to the lowest levels in about three years. In response to Moscow’s stance, Saudi Arabia, the oil cartel’s de facto leader and biggest oil exporter in the world, launched a price war against Russia, shocking the market and causing a crash in oil price globally.
Oil has been the major foreign earner for Africa’s biggest economy, accounting for over 50 percent of government revenue. This dependence makes it vulnerable to external economic shocks, such as weak demand in crude oil globally fueled by the new coronavirus, as well as the Saudi-Russia impasse. In addition to forcing the government into reviewing and cutting its record budget for the year, the crisis has put a strain on revenue, threatened foreign reserves and triggered devaluation fears.
When a country cuts down on its spending, the impact can be either good or bad for the economy, depending on what aspect of the budget was reviewed. If the government cut spending when the economy is already in difficulties, it will bring about a significant fall in real GDP. But if this happens when the economy is booming, it would help to reduce inflation, however, would cause only a small fall in real GDP. Also, a cut in the budget would translate to a shortage of money in circulation which would amount to inflation, putting a strain on public spending.
As of Q4 of 2019, the country’s economy had grown beyond the International Monetary Fund (IMF) forecast, recording the highest quarterly growth since its 2016 recession. The IMF, last month, cuts its projection for the country’s 2020 growth to 2 percent from 2.5 percent but with the new development, the country’s growth could decline below 2 percent.