In economics, one measure of the health of any economy is the GDP. The GDP is simply the value of output the nation produces
For example, a bakery in Agege, makes 500 loaves of bread a day, and sell them for N10. In a very simplified way the GDP of that bakery in Agege is N5,000 i.e. 500 loaves of bread multiplied by N10.
Now assume the bakery makes 600 loaves of bread at same price, then the GDP growth rate is increasing from 500 to 600 or 20%.what if the volume of bread falls from 500 to 400? Same thing, GDP growth has reduced by 20%. When the bread sales reduces, it’s a slowdown, if the bread sales is negative for 6 months, it’s a Recession, if that Recession lasts for a year, it’s becomes a Depression. In Nigeria, the GDP growth has slowed down, and if we do nothing, then we will enter a depression i.e. we will have negative growth……
Why is GDP slowing? Simple, the Nigerian economy is a derivative of crude oil, if crude oil price is up, Nigeria economy is up, Crude oil price is down, and Nigeria economy is down. Today crude oil is below $50, so this has slowed down our economy. In actual terms the Federal Government revenues are reduced, its ability to spend is limited, but why is it limited?
Well the FGN get the bulk of its foreign exchange revenues in United States Dollars USD from the sale of crude oil. The CBN converts that USD to Naira and gives to the Federation. So if crude oil is $100, the federation get more Naira, same way, if oil price falls $50,the FGN get less Naira.
The fall in crude oil prices has caused macroeconomic instability…GDP growth has slowed, inflation has risen …in economics it’s called a stagflation.
Like the Vice President rightly said “you spend your way of a recession, you don’t cut back”…true, but you spend on simulative activities i.e. capital projects roads, rails etc.
So we have to spend, agreed.
if we want to spend on building a 10 lane expressway, we currently either
1. Sell more oil
2. We borrow
Let’s explore option 1. Sell more oil, the problem with this is that oil prices have fallen and the US and China have slowed down oil imports. Add Iran re-entering the market and you see a glut of oil, there are too many oil sellers in the market, thus oil price will stay depressed…..it will take a war to move oil to say $70…so even if we have the oil to sell, the markets are getting smaller.
Option 2, we borrow. Nigerians have an aversion to their government borrowing which is understandable. However there is nothing wrong with responsible borrowing to build projects that will generate cash and pay back the loans. Still borrowing which oil process are falling carries a repayment risk, should oil crash.
Which then bring me to our third option, selling majority stakes in the NNPC.
Nigeria wants to create a $25b fund for infrastructure to fight the recession, we should fund this not by borrow but by offloading the NNPC JV to China other investors, Nigeria thus becomes minority shareholders and with China funding JV cash calls m we are raise outputs and fix our refineries.
In 2009, the CNOOC, of China's sought to acquire 6bn barrels of oil, equivalent to one in every six barrels of the proven reserves in Nigeria. The Chinese wrote to President YarAdua offering then as reported between $30bn to $50bn cash for the 6bn barrels of crude oil. In essence China wanted to get strategic oil reserves, and was paying cash today for it.
Events moved ahead and that offer was not taken, but I suggest President Buhari reaches out to China again. Sell to China 51% of NNPC JVs, take the cash, and invest in Infrastructure.
Nigeria own 60% of the JV agreement with the IOC, (55% of Shell JVs) out of that 60%, let Nigeria sell to China 31%, get cash in advance. In essence let Nigeria stop being majority shareholders in the JVs. It’s important not just to sell for cash, but to sell for cash and technical expertise. With China as technical partners of the JV, they can also be technical partners to build and repair the existing refineries.
Why should we sell NNPC, because NNPC is a liability to Nigeria, not an asset? According to the NNPC, it was supposed to make a profit of N311b as at August 2015, however the NNPC is reporting a loss of N378b.
All our refineries combined have a revenue of just N535m, ($2.67m), with a combined loss of N48b yes Billion, this is at August 2015, while operating at 10% of capacity utilization…abysmal
Keep in mind Nigeria cannot even afford to meet our JV cash calls. The GMD of NNPC put the outstanding unpaid obligation to the JV partners at $6b yes billion. This lack of funding of JVs has declining JV production from 70% in 2008 to less than 35% today.
NNPC is actually a drain, a liability. The oil production is increasing on the Production Sharing platform owned and operated by the IOC rather than the JVs owned by the NNPC. The NNPC is a wasting asset
So why will China want to buy a wasting asset? Well because China needs the NNPC strategic oil reserves. Also NNPC still lifts crude oil worth $9b as at July 2015. China can also fund the JV cash calls and reduce our cash call demand.
Do you want to learn peachtree accounting software & increase your capacity for recording & interpreting accounting information? CALL 0803 385 7245 NOW or click here for details.
Interested in studying in Canada, USA, Australia or New Zealand? Let Stanvista help with their cutting edge admission & visa services…Call 0703 541 3366 or Click here.
Do you want to relocate to or study in Canada? AICL can assist with the process…Call 0802 896 7232 or Click here.