Dr. Ousmane Dore, the Country Director, African Development Bank (AfDB) for Nigeria, has predicted that the Nigerian economy will grow by six per cent in 2015, in spite of the oil price shock.
Dore said in Abuja, that the economic prospect of the country was still good, even though it was going to be affected by the oil price shock.
“The country’s prospect is going to be affected downward by this major oil price shock and we still expect growth to be in the range of 5.5 to 6 per cent this year, notwithstanding the shock.
“How is the economy going to be affected by this? It clearly depends on how the government is going to react to this shock. The first thing is to see if this shock or decline it is going to be transitory or permanent.
“To the extent that they are permanent, you need to do a major adjustment to the budget, because as you know, the budget is based on benchmark price for oil.
“As you know today, the price is even below the 65 dollars per barrel that the government has budgeted, it means that the government would require a tough adjustment to counter the impact of the decline on its revenue.”
Dore said should the government failed to react positively to the oil price shock, the situation might lead to large borrowing since the country’s economy was largely dependent on oil export.
He said there was need for government to view whether the price shock would be transitory or permanent, adding that budget adjustment was necessary should the fall became permanent.
Dore said a continuous fall in oil prices below the revised benchmark of 65 dollar per barrel could reduce total federally collected revenue of which oil contributed over 70 per cent.
He said if the gap could not be filled by increasing non-oil sources of revenue, the situation could also force the government to revise its Medium-Term Expenditure Framework (MTEF).
According to him, this could mean embarking on additional and expectedly painful spending cuts with significant consequences on the future development prospects of the country.
“If the government does not react, then what is going to happen? It may have to go into large borrowing to make up for the revenue short fall because oil let’s keep in mind is still some 80 per cent of the revenue of the government.
“So, you are going to be experiencing a large shortfall, because the price is going from 100 dollars plus to less than 50 dollars, it going to require that.
“But fortunately, what the government has been doing was to readjust the budget to address those shortfalls.
“So it’s been a lot of fiscal measures that have been put in place, which might raise additional revenue to non-oil, to taxation of all these private jets and tightening loopholes and closing exemptions.”
The country director said the effect of the falling oil prices could also be felt in the current account, which could be in deficit for the first time in many years.
He said that unless drastic measures to increase non-oil sources of export were taken, the financial account which was already in deficit could adversely affect the foreign exchange reserve.
Dore said the deficit could also affect monetary authorities’ ability to use the reserve to meet the country’s international payment obligations, manage inflation rate and use it as a buffer against external shocks.
“The current account is also likely to be in deficit for the first time, because if you export revenue is low, your import bill do not change much because Nigeria is basically exporting oil.
“Then you are likely to find the current account to be much in deficit, but right now, it is in surplus.
“And we do know the financial account is in deficit and you add that to a current account deficit, you will have a balance of payment problem which will translate into a decline in the reserve position.
“And we should prevent the Central Bank of Nigeria from continuous recourse to the reserve to defend the naira that impact on the naira value, which now has depreciated. So this is what this price shock is doing to the economy.”
Dore said that if the country’s fiscal buffer, which is the Excess Crude Account, were kept intact, it would have been a stabiliser for the economy in the face of oil price crisis.
He said the country had been basing its budget on realistic or conservative price, adding that when the benchmark was 78 dollars, the oil price was above 100 dollar per barrel.
He said that the differential price, which was put into the excess crude account, would have been the automatic stabilising mechanism to cushion the shock.