The fall of global oil prices below Nigeria’s 2014 budget benchmark has sent the country into an economic crisis mode. However, attempting to remedy the situation leaves the government with virtually two dreaded options – cut government spending or borrow.
The government might not require any knee-jerk actions immediately. It still has an excess crude savings and a foreign reserve, both of which could cushion the effect of the crises for more than 10 months. But if global oil prices fail to climb, and there is no certainty it will, Nigeria’s economic leaders may be unable to resist either scaling down government expenses or scaling up borrowing. The country may even attempt to do both, although any of these three options will be accompanied by inescapable dire consequences.
Actually, Nigeria’s Minister of Finance, Ngozi Okonjo-Iweala, has already confirmed that the government’s review of its recurrent expenditure will begin right away. Why Recurrent expenditure? Here’s the maths; oil contributes a massive 75 percent to Nigerian government’s revenue, most of which goes to recurrent expenditure – which involves salaries, overheads and miscellaneous expenses. Nigeria’s recurrent expenditure has always been extremely high; this year it rose to 74 percent of the government’s 2014 budget. The oil crisis means the government may opt to a trimming exercise in the 2015 budget; a structural adjustment that may not go down well with the public.
Finance Minister Okonjo-Iweala has said #Nigeria will from this month start to feel the impact of falling global oil prices.
— Retweet Me (@WePushNews) November 14, 2014
Cutting recurrent expenditure would probably mean cutting public sector jobs and a freeze on new employment; this will be an invitation to protests and social unrest. Although Nigeria’s private sector jobs are enjoying a rapid growth, majority of the country’s workforce are employed by the public sector. Thus, downsizing government workforce will be hitting hard at the major source of livelihood in the country.
The government could also look to totally pull out its subsidy on petroleum products; this should prove very risky. President Jonathan’s decision to completely remove petrol subsidy in 2012 ignited a nationwide protest that only mellowed after it was reverted to a partial one. Going back that path will not be an easy decision for the president’s economic team to make.
But, if cutting down government spending is shaking hands with the devil, borrowing to fund government spending commitments will be plunging into the deep blue sea.
Nigeria has been in those dreaded waters before; prior to its 2004 debt relief, the country’s external debt stood at $35.9 billion and it had to pay $4.9 billion every year on debt servicing. Currently, Nigeria’s debt profile is in a healthy state with external indebtedness relatively low at $6.67 billion. But that could easily change if the government takes to more aggressive borrowing. Not only does borrowing mean accruing more debt, there’s also the unenviable liability of debt servicing. High debt profile also brings lower international credit rating which paints a country’s economy in bad light, and reduces its attractiveness to foreign investors. Then there is the lingering worry about the conspirational motives of rich countries to leverage on the debts owed by poorer nations to control and dictate socio-economic policies.
Both ways seem gloomy for Nigeria. And darker when you throw in the fact that the Nigerian government may actually need to cut spending and also borrow. If the performance of global oil prices does not get better, then, in the long run, neither reducing expenses nor borrowing will be able to sustain the economy alone. Both measures would be needed.
Although still healthy, Nigeria’s debt profile had already begun to climb even when the oil price was well above the budget benchmark. The country has twice raised money from Eurobonds since its debt relief in 2004. First in 2011 with a $500 million 10-year Eurobond, then in 2013 when it issued a $500 million 5-year bond at a yield of 5.375 percent and a $500 million 10-year bond with a yield of 6.625 percent. The IMF has already warned African nations about the rate of borrowing, but given the deteriorating situation, Nigeria may be unable to resist seeking foreign funds. And more borrowing is often accompanied by cutting recurrent expenditure, as advocated by international financial institutions like the IMF and the World bank. You can call this the return to austerity measures, perhaps reminiscent of Nigeria’s infamous SAP days.
However, none of these have happened yet, and while they unfortunately seem probable, there’s still hope that they could be avoided – at least their impact could be made very less gruesome.
Smart choices like prudent spending on overheads is one way to go; the government should move towards reducing exorbitant travels by public officials, and trim bloated allowances. Plugging corruption loopholes in governance and improving tax remittance should also free up critical funds needed to whether this storm.
