Lagos Chamber of Commerce and Industry (LCCI) has said that the draft 2016 budget benchmark for crude oil at $38 per barrel looks very fragile, unsustainable and needs a downward review.
Commenting on the medium term expenditure framework and fiscal strategy per for 2016, LCCI in a statement signed by its president, Chief (Mrs.) Nike Akande, the draft budget benchmark for crude oil at $38 per barrel looks very fragile given the continued and projected boost of supply side of oil in the international oil market and its potential impact on oil price.
It is advised, in the circumstances, that the benchmark be further reduced. Crude oil prices opened the week on a weak form. Light Crude Oil stood at $35.27 while Brent crude priced for $37.07 per barrel.
LCCI said the quick win is for government to focus on policies and regulations that attract private capital and encourage investment. In addition, efficiency of tax administration is very vital to expand the current non-oil revenue base Exchange rate benchmark of N197/$ in the 2016 budget appears too conservative and at variance with prevailing realities.
“We hold that the exchange rate benchmark should be adjusted to N220/$ threshold in the 2016 budget.
Noteworthy is the provision of zero allocation for kerosene subsidy which has been one of the biggest burden over the years. The reduction of federal government’s share of fuel subsidy to N63.29 billion compared to almost N1 trillion spent on subsidy in 2015 is also a welcome development. These will definitely free up resources to finance other priorities especially infrastructure”
LCCI however, reiterated its calls for the deregulation of the petroleum downstream sector in order to reduce the pressure on government finances and the foreign exchange market.“This will not only create savings for investment in priority sectors but also provide a great opportunity to attract more investment to the petroleum downstream oil sector. We are equally happy with the disposition of Executive on the passage of the revised petroleum Industry Bill (PIB). The PIB is an important enabler to unlock opportunities in the oil and gas industry as well as transparent operating environment in the sector”, LCCI said.
It could be recalled that Brent crude, against which Nigeria’s oil is priced, fell below the country’s crude oil benchmark of $38 per barrel to $36.68 a barrel . U.S. crude’s West Texas Intermediate (WTI) also fell far further to $34.71 a barrel.
Crude oil prices have been on the decline since last week after the decision by Organisation of Petroleum Exporting Countries (OPEC)’s to maintain crude oil production.
The price of OPEC basket of 12 crudes stood at $34.69 a barrel on Thursday last week and was $34.80 a barrel the previous day.
Brent crude futures fell below $38 a barrel for the first time since December 2008 on Friday last week. WTI also settled at $35.62 a barrel, down by 3.1 percent, or $1.14.
The U.S Energy Information Administration (EIA) in its December oil market report released at the weekend, forecasts that Brent crude oil prices will average $53 per barrel in 2015 and $56 per barrel in 2016.
It stated: “EIA’s crude oil price forecast remains subject to significant uncertainties as the oil market moves toward balance.
“During this period of price discovery, oil prices could continue to experience periods of heightened volatility. The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices”.
Also speaking on the latest development, Director, Centre for Petroleum Energy Economics and Law, University of Ibadan, Prof. Adeola Adenikinju, said that the $38 per barrel is a realistic, though conservative approach by the government.
According to him, in view of the volatile oil market, it is the right approach by the Federal Government.Adenikinju stated: “It will encourage the government to cut its coat according to its cloth. However, if the government experiences an upside in the global price of oil, then the government can always submit a supplementary appropriation bill to the National Assembly”.
He noted that the implication of this is that the current budget must contain the priorities of the government. “It also supports the zero budgeting as only capital expenditures that are in sync with government overall objectives will be provided for in the budget.
Hence, the government must prioritise its expenditures and cut down on areas of wastages. Presently, the cost of governance is on the high side and it is good that the government, through the Federal Ministry of Finance, has set up a committee to check this. Next year, I expect the government to diversify its revenue base to non-oil sectors and wealthy Nigerians.
If the services and agricultural sectors are now the leading sectors in terms of contributions to the Gross Domestic Product (GDP), it is only normal that they contribute their fair share to government revenue and foreign exchange earnings.
“There is also prospect for introducing property tax especially in cities like Abuja, Port-Harcourt, Lagos, Kano and Kaduna to boost the income of state governments. There is no doubt that the lower oil price benchmark will impact negatively on government capacity to perform its statutory responsibilities”.