The price is 20% above the reference budget
By Nkiruka Nnorom
There are signs that the Federal Government may be on track to meet and perhaps exceed the projected oil revenue target in the 2021 budget if the recent rise in crude prices is sustained into the new year.
Investment analysts noted that, in addition to meeting the oil revenue target, Nigeria also has the potential to reduce the estimated N5.2 trillion budget deficit and government borrowing to finance the budget if the continued increase in the international price of oil oil remains for the remainder of 2021..
Brent crude prices rose above $ 50 per barrel last week (20% above the budget benchmark) on optimism that global Gross Domestic Product (GDP) is recovering from the Covid-19 pandemic thanks to the discovery of vaccines and the hope of distribution and distribution. it also reflects the ability of the Organization of the Petroleum Exporting Countries (OPEC) plus Russia (OPEC +) to enforce some level of collective production cuts.
Meanwhile, the federal government has estimated that revenue from oil sales would contribute no less than 25.5 percent to its 2021 revenue target after setting the oil revenue projection at N2.01 trillion.
Following projections, the federal government had also set an oil price benchmark at $ 40 per barrel, while daily oil production is set at 1.86 million barrels per day.
Public finance The analysis shows that the collection of oil revenues for the third quarter ended September 30, 2020 (Q3’20) stood at N953.09 billion, N1.06 trillion or 52 percent and 63.9 percent below the oil revenue targets for 2020 and 2021, respectively.
Despite the shortfall, investment analysts have said that the FG can still hit the target, but claimed that achieving the target would also depend on maintaining the oil production target for the entire year.
The further breakdown showed that collections from oil revenues in the third quarter of 2020 were 25 percent and 28.9 percent lower than those received in the second quarter of 2020 and the third quarter of 2019, respectively, but They represented a 7.6 percent increase above the revised benchmark of N886.16 billion for the period. .
Financial experts who spoke with Public finance He explained that the global price of oil above $ 50 would allow the country to reach the goal of oil revenues and would lead to a better entry of dollars to the country.
Victor Chiazor, Head of Research at FSL Securities, said: “Rising crude oil prices remain positive for the Nigerian economy. Given the 2021 oil benchmark price of US $ 40.00 per barrel, a global price above US $ 50 per barrel will effectively allow Nigeria to meet its oil revenue budget once our oil production volumes go unseen. affected during the period.
“A higher oil price for fiscal 2021 will also help reduce the budget deficit and reduce government loans needed to finance the 2021 budget.”
However, he said the government should focus on revenue streams to cushion the impact of any unforeseeable incidents in the oil market that could negatively affect revenue targeting.
He said: “However, we must be cautious that oil prices remain above the $ 40 budget benchmark for the full fiscal year 2021, as significant headwinds persist that may cause prices to oil prices are going down in the short term and therefore we need to focus on other sources of revenue for the federal government besides crude oil.
To corroborate this, Ayodeji, Ebo, Senior Economist / Head of Research and Strategy, Greenwich Merchant Bank, said: “The uptrend in crude prices is positive for Nigeria given the high dependence on oil revenues and the historical deficit in revenues. not oil tankers. With the price of oil above the budget reference, the government should be able to meet its projected oil revenues,
“However, the downside risk is the OPEC + production cut, which is significantly lower than the 2021 budget projection. Remember that the excess above the budget reference price of oil is kept in the Excess Account. Crude, which is the saving for the rainy day. To avoid continued revenue vulnerability to crude oil prices, there must be a growing effort to improve the non-oil revenue target. “
In their own views, Coronation Merchant Bank analysts said: “As a general rule, Nigerian public finances do well when oil is consistently trading above $ 50 a barrel. Oil provides (in a good year) the federal government more than 60 percent of its revenue and supplies the country with more than 80 percent of its export earnings. Since much of these profits are deposited by the Nigerian National Petroleum Corporation (NNPC) with the Central Bank of Nigeria (CBN), this is a crucial source of foreign exchange (FX). So, for example, the long period of low oil prices from late 2014 to mid-2017 (the price of Brent averaged US $ 45.10 / bbl in 2015 and US $ 56.09 / bbl in 2017) led to a depressed level of CBN FX reserves. This precipitated two devaluations in the interbank exchange rate, from N199 / US $ 1 to N316 / US $ 1 in mid-2016 and from N316 / US $ 1 to N357 / US $ 1 in August 2017.
“Therefore, the recent rise in the price of Brent comes at a good time for CBN. This year, the CBN has avoided the fate it suffered in 2016 and the first half of 2017, that is, a level of reserves below 30,000 million dollars (the current level reported is 34,970 million dollars). The cost of this preservation has been a sharp reduction, starting in March, in the supply of US dollars from CBN to the NAFEX market.
“If an oil price above $ 50 a barrel takes hold in 2021, it will be tempting to think that the nation will return to normal. Normal, in this case, means a healthy inflow of US oil dollars that supports government revenue and allows the CBN to be the provider of last resort to the forex markets.
“Therefore, an oil price above US $ 50 per barrel brings the prospect of an improvement in US dollar inflows.”