Nigeria’s freshly presented 2016 budget proposal could be at risk of being saddled with a hefty deficit, if passed in its current state.
The budget which is hinged on an assumption of $38 a barrel already smells of trouble, especially if oil prices continue its slide to around $20 a barrel in the next year; and the International Monetary Fund (IMF) seems to think that this slide very probable.
According to IMF predictions, the bottom of the oil slide hasn’t yet been reached due to the fact that additional supply from Iran is still waiting on the sidelines. Iran – which is OPEC’s 2nd largest oil exporter, and 4th largest producer in the world – is waiting for the United Nations nuclear activity monitoring period to elapse, and for the sanctions to be lifted, before unleashing its oil into the already flooded market.
It is estimated that Iran could increase its output by one million barrels per day, even as the global market is already oversupplied by up to two million barrels a day.
The IMF believes that this will result in the downward pressure of oil prices. Potentially prices might still fall by between $5 and $15 a barrel from the current price level.
Additionally, there are concerns about the USA lifting a ban on the exports of its oil, adding to the global supply, which is continuing to outstrip demand.
Risky Budget
This situation is significant for Nigeria because the entry of Iranian oil could see as much as $15 shaved off from the current $38 per barrel, landing the oil price at the $23 range.
With the 2016 budget benchmarked at $38 per barrel, if the price of oil falls to $20, a $39.6 million hole (N7.8 billion) could be blown in the budget. [($38-$20) x 2.2 million barrels = $39,600,000].
What impact will this have?
Revenue projections will be in jeopardy, leading to…
More Borrowing:
In order to fulfill the promises made, the government will have to borrow more to fund the capital and recurrent expenditure.
Capital projects will always be the first victim of revenue shortfall:
Capital projects will assume second priority as they will be chucked aside to in order for the government to be able to pay salaries and other recurrent bills.
Adverse Effects on Forex:
Lesser revenue from oil exports means lesser forex earnings, fostering the slide of the Naira against the dollar.
Hi, your risky budget calculation is wrong.
Firstly, its 2.2 million barrels per day, not 2.5 million
Secondly, you need to pro-rate calculation for the whole year, not just per day.
Lastly, all of the revenue from the sale of oil does not all go to the govt. I assume only a percentage of the sale is due to the govt, with the remaining going to the production partners.
Great job nonetheless – keep up your good work