It is worthy of note that the hearty cheers and warmth the beginning of a new year brought already seem like a distant memory today. I remember all the new year memes, challenges and posts that were met with fun, laughter and so much enthusiasm. 2020 was our year! It had so much in store. However, like a horror movie, the year seemed to unravel as the weeks went by, starting from the heat waves, the Australian wildfire, Volcanic eruptions and the most devastating of all, the Human Corona Virus (COVID-19) pandemic sweeping through countries with the force of a wildfire and hurricane combined. I am pretty sure we as a people will survive these times and I truly hope that a cure for the COVID-19 is in sight. I’ll like to advice everyone to stay safe, take proper preventive measures and stay at home.
In other news, the ongoing price war between Saudi Arabia and Russia if not curtailed could seriously impact the world economy. Its impact on Nigeria’s economy could be devastating with the possibility of another recession looming.
About one week ago, the Organization of Petroleum Exporting Countries (OPEC) was unable to come to an agreement to reduce the global oil supply, through production cuts, in the face of falling oil prices as a result of the COVID-19 pandemic which has caused a halt in production activities in some affected countries (and with it a fall in global oil demand). Russia’s refusal to agree to the proposed production cut by Saudi Arabia sent oil prices down sharply. Saudi Arabia responded to this move by slashing its own oil prices thereby sending the oil prices further downward, with oil prices experiencing the worst prices seen with a drastic price of about $26 per barrel. If there is no agreement and the oil price stabilizes around the $30 per barrel mark it could have major budgetary and economic implications on many oil dependent nations such as Nigeria.
Nigeria, for the longest time has been an oil dependent nation with majority of its economic income coming from the oil sector as well as its budget being financed largely by the proceeds from oil. However, as a result of corruption and mismanagement over recent years, the financial and economic benefits gotten from oil production have not been felt within the economy but has also led to borrowing and How the Global Oil Price War Affects Tax Revenue in Nigeria 6 depleting of the country’s foreign reserves. Therefore, if the price war persists and the oil price remains at its current level, its economic implication on the Nigerian economy could range from inability to meet budget estimates, high inflation rate which has steadily been rising and reached a high of 12.20% according to the latest Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS), further depletion of foreign reserves which currently stand at a low of $35.92bn and worst of the lot a repeat of the drastic recession experienced in 2016. To put this into context, Nigeria’s $35.92bn reserves pales in comparison to other major oil producing nations such as Russia ($562.3bn) or Saudi Arabia ($501.8bn).
With an estimated expenditure of N10.59tn and an estimated revenue of N8.42tn, the Nigerian budget is already a deficit of N2.18tn. In calculating the above estimated revenue, the oil price was earmarked at $57 and based on this price it was estimated that oil will contribute N2.64tn to the total revenue. However, if the price war persists and the oil price stabilizes around the $30 mark, which is a 47% fall in the budgeted price, oil will only contribute about N1.4tn to total revenue. This will lead to an even higher budget deficit of N3.42tn (note the oil price as at the time of writing was $27.49, with Goldman Sachs predicting it could go as low as $20). As explained, this fall in oil prices will not only cause discrepancies in the fiscal budget, it will also have far reaching consequences on other forms of revenue generation especially tax revenue.
Tax revenue will take a huge blow as a result of fall in the oil prices as the oil sector has overlapping effects on all other sectors in the economy. The effect of the low oil prices coupled with the high inflation rate will have adverse negative effects on the economy and will lead to large scale fall in revenue generation in major sectors as well as massive reduction in consumer purchasing power and standard of living. This will affect the ability of various forms of taxes to generate the expected revenue to sustain economic projections.
In conclusion, if the situation remains the same, the Nigerian economy could gradually slump into a recession, which could be take a while to recover from as we do not have enough reserves to draw from to boost the economy. There is a saying that “when two elephants fight, it is the ground that suffers.