A report by Ecobank Group warned last week that Nigeria’s debt situation would remain vulnerable to any unexpected large drop in oil prices.

The report also pointed out that Nigeria’s debt would remain susceptible to other macroeconomic shocks, even as it urged the federal government to properly manage the situation.
The Ecobank report said: “Nigeria’s debt situation will remain vulnerable to any unexpected large drop in oil prices or other macroeconomic shocks to the economy; this could lead to a renewed debt distress.

“This factor will continue to weigh on the country’s sovereign credit rating. Amid this and other factors, Nigeria’s sovereign foreign currency long-term credit ratings remain below investment grade, albeit with a stable outlook.”
But it noted that the outlook for Nigeria’s ratings compared more favourably than that of South Africa, which has a negative outlook.
“Amid growing efforts to reduce external financing risk, the federal government’s domestic debt has emerged as the bigger share of total debt, reflecting increased efforts by the federal government to finance a larger proportion of its deficit from the domestic capital market rather than from international creditors.

“Federal government’s domestic debt has risen from $10.4 billion (11.7 per cent of GDP) in 2004 to $43.4 billion (16.6 per cent of GDP) in 2012. The stock of domestic debt is likely to remain much higher than external debt, although the government’s recent effort to exercise fiscal prudence should see domestic borrowing fall, remaining well below the federal government’s target of 30 per cent of GDP.

“Already, growth in domestic debt has slowed to 21.7 per cent, down from 40 per cent in 2010. However, despite the downward trajectory in domestic debt, debt-servicing costs remain high (amounting to $4.4 billion; nearly two per cent of GDP in 2012), reducing the fiscal space for investment in otherwise core areas of priority,” it added.

Continuing, the report said the move by the federal government to set aside N100 billion to be used to retire domestic debt would help the country, adding that plans to reduce the bloated civil service wage bill, alongside falling bond yields, would also go a long way in reducing domestic borrowing costs.

Also, concerned about Nigeria’s rising debt profile, the House of Representatives recently gave its House Committee on Aid, Loans and Debt Management a mandate to investigate what it called the “rising incidence of domestic public debts” owed local contractors across the country, which it said had so far risen above N6 trillion.
The mandate was given following a motion by the chairman of the committee, Hon. Adeyinka Ajayi, while presenting the findings of the committee on the subject matter.

Ajayi had said over N500 billion was being used annually to service domestic debts, adding that the House had concerns over about the country’s rising debt.
According to him, the domestic debt profile began to soar since the country exited the Paris Club debt in 2006, adding that, “the structured domestic debt profile of the nation stood at N6.1 trillion, while foreign debt stood at $6.7 billion or N1 trillion as at March 2013.”
Revenue Hit by Oil Theft

Nigeria’s mounting debts aside, the country’s economy has been made more vulnerable to macroeconomic shocks by a fall in revenue as a result of crude oil theft in the Niger Delta estimated at 400,000 barrels a day.
In its bi-monthly Economic and Business Update of July 24, Financial Derivatives Company (FDC), an economic and investment consultancy in Lagos, showed that Nigeria’s crude output has continued on its downward trend.

Quoting the Organisation of Petroleum Exporting Countries (OPEC), the FDC report indicated that Nigeria’s oil exports declined to 1.86mbpd in June, from 1.9mbpd in May and 1.92mbpd in April 2013. The steady decline could be attributed to incessant theft and pipeline vandalism alongside multiple enactments of force majeure.
“Nigeria gets 78 per cent of its fiscal revenue from oil receipts. Shrinking oil output and soft prices create the risk of a government revenue shortfall.

“In addition, and due to falling oil receipts, foreign exchange inflows have been on a decline: a 4.4 per cent decline from the preceding month to $3.1bn in May. A reduction in foreign exchange inflow will affect external reserves, which are already on a decline due to their increased use to support the naira value,” said FDC.

To buttress this point, a review of foreign reserves accretion from the beginning of the year showed that reserves which had climbed from $44.3 billion to almost $49 billion between April and May this year, had fallen to a little over $47 billion on August 1 (See Table 1).
In the same vein, savings in the Excess Crude Account (ECA) have also been hit by rising oil theft, as the ECA which stood at $9.24 billion in January this year had plunged to $6.2 billion in May and $5.8 billion in June.

Commenting on the threat posed by oil theft, Managing Director of FDC, Mr. Bismark Rewane, told THISDAY at the weekend, that the loss of 400,000 barrels per day to theft translates to 20 per cent of the country’s output, which amount to about $7 billion to $14 billion a month.

“This implies that 20 per cent of Nigeria’s revenue is being lost to crude oil theft. But it does not just stop at that, because the people who are stealing the crude oil have to sell it at a discounted price in the black market, so as long as they do not get full value and it cannot be invested in the national economy, it also amounts to a drop in our Net National Income (NNI),” Rewane said.
He added that a third danger is that the proceeds from crude oil theft could end up in the hands of Nigeria’s enemies. “It poses a national security risk because the proceeds could be used to buy arms and ammunition by enemies of the state, which could be used to fight and terrorise Nigerians,” he warned.

He however added that the drop in revenue may not impact on Nigeria’s ability to meet its obligations, stating, “Our foreign reserves are still enough to cover 10 months of imports. The worst case scenario is the federal government could resort to printing money to meet its obligations. But the impact will be inflationary and could lead to the devaluation of the naira.”
Major Oil Marketers Cry Out

Despite the option available to the government through quantitative easing, major oil marketers have been hit the most over the delays by the federal government to meet its obligations to them in the form of fuel subsidy payments.
They have cried out and accused the federal government of “deliberately defrauding marketers under false pretext”. They are incensed that the federal government awarded them licences to import petroleum products into the country and compelled them to sell the products to Nigerians at a regulated ex-depot price (lower than the landing cost of the cargo).

Not stopping at that, the federal government not only refuses to pay the subsidy element due to them in a timely manner but also refuses to acknowledge the interest and foreign exchange differential losses incurred by marketers as a result of long delayed payments.
The guidelines for the administration of the Petroleum Support Fund (PSF), the marketers pointed out, provides and states clearly that petroleum marketers be paid within 45 days of submitting complete and verified documents to the Petroleum Products Pricing Regulatory Agency (PPPRA).

Unfortunately, the government has never kept faith with the stipulated time frame. Instead, payments take several months to be processed and even when processed, payment face further delays, which can last several months.
“In all that time, interest is building on the loans with which the products were imported into the country,” explained one major marketer, adding that the delay was crippling their businesses.

“We have a situation where our shareholders are suffering just like bank shareholders who are also bearing the brunt of the risk taken by the banks as a result of the facility given us. They cannot be made whole until government pays us,” he said.

THISDAY investigations also showed the summary of the PSF import cycle as proposed by the guidelines, which is as follows: The marketer is issued with a quarterly licence to import petroleum products; the marketer imports and delivers the product to a depot location approved by DPR; discharge is monitored and signed off by PPPRA operatives, DPR, government appointed external auditors as well as industry consultants; marketer submits complete and verified documents to PPPRA; PPPRA processes the documents by verifying, batching and issuing the marketer with a Sovereign Debt Statement (SDS) for all approved transactions; marketer presents the approved SDS to CBN who presents them with a Sovereign Debt Note (SDN) in turn; marketer gets value for the SDN within 45 days of submission of complete and verified documents to PPPRA.

Notwithstanding the above, the government perennially fails to promptly make good its contractual obligation to pay marketers the subsidy element of their claims against PPPRA.
“Subsidies have historically been paid by the government sometimes in excess of 180 days from due date,” another marketer added.
Due to these delays, oil marketers consequently end up with massive exposure to commercial banks that support their trading as they are faced with mounting bank interest charges and exposure to foreign exchange fluctuations due to delays.
Another sour point of constant friction the marketers lamented is “whilst the guidelines provide for the payment of subsides, they have no provisions for treatment of accrued interest and exchange rate fluctuations.
“This is notwithstanding the recommendation of the stakeholders committee constituted in 2010 (that brought about the introduction of the SDS and SDN) that marketers be paid interest incurred on outstanding PSF receivables that have been paid after the 45 days prescribed by the guidelines.
“Worst of all is that these delays have whittled down the efficacy of the SDN introduced in 2010 as a negotiable short term sovereign instrument designed to meet negotiability and liquidity criteria.

“Regrettably, due to the delayed and unpredictable nature of issuing and liquidating the SDNs by the government, the negotiability and liquidity characteristic of the SDN has been lost as the commercial banks have refused to discount SDNs for marketers.
“Furthermore, these delayed PSF receivables have negatively impacted marketers who have over the years, made significant investments in infrastructure to support the federal government in guaranteeing efficient and effective distribution of petroleum products within the country, as the delayed payments and continued excessive exposure to commercial banks puts them in the red, making it difficult to recover fixed costs.”

THISDAY investigations further revealed that the amount batched but not paid is about N145,774,279,859.67 billion. The breakdown of which is as follows: Batch D N32,898,428,758.27 billion; Batch E N32,005,884,035.88 billion; Batch F N29,467,038,868.91 billion; Batch G N27,017,928,196.61 billion; and Batch H N24,385,000,000.00 billion.
Recently, petroleum products marketers under the aegis of Major Oil Marketers Association of Nigeria (MOMAN) threatened to halt fuel importation owing to continued delay in the payment of their outstanding subsidy claims.

The marketers, comprising Conoil, Oando, Forte Oil, Mobil Oil, Total Oil Plc and MRS, who currently import about 45 per cent of petrol consumed nationwide, also resolved to embark on massive downsizing of their staff as a cost-cutting measure.


Shale Oil Poses Clear and Present Danger

Other than oil theft and soft oil prices that is impacting on the country’s revenue, massive discoveries of shale gas deposits in the United States of America has already impacted on the quantity of oil Nigeria exports to the world’s largest consumer of crude oil. As a result, Nigeria has been forced to find new markets for its crude oil in China and India.

Not unmindful of the impact shale oil could have on the demand and price of crude oil two years from now, several countries including China, the second largest energy consumer after the US, are developing strategies to exploit shale gas in their countries.
This is worsened by the fact that the shale oil discovered in the US is light-tight oil, which is a low sulphur oil and has the same gravity as Bonny Light and Brent Crude, rendering the continued importation of Nigeria’s crude oil unnecessary in the near future.

Indeed, an analyst informed THISDAY that shale oil discoveries along with massive discoveries of natural gas in Mozambique and Tanzania could adversely affect the Final Investment Decision (FID) on Brass LNG and could slow down investment in Trains 7 and 8 at the Nigeria Liquefied Natural Gas (NLNG) project in Bonny, Rivers State.

He said: “Investment in new gas projects may not yield the kind of returns Nigeria is expecting. The US has discovered more than 30 times the amount of oil deposits that it produced in the past. Between 2007 and 2012, the shale gas revolution became more real. This means that by 2020, the country would have enough oil to meet its domestic requirments, and become a net exporter of oil in the region of 2mbpd.”

He further pointed out that in recent weeks, where there used to be a huge price differential between the US crude WTI and Brent, which serves as benchmark for Bonny Light, there has been a convergence of their prices. This, he said, implies that the attraction for Bonny Light would continue to dwindle.
As a result, analysts have warned that if Nigeria fails to diversify her economy, the country might end up drinking its crude oil in the near future.

Angst has further been expressed that investors such as business mogul, Alhaji Aliko Dangote, who has raised an estimated $1.5 billion and indicated his preparedness to build a refinery in the South-west, has been frustrated by the authorities in government.

“The federal government just does not get it. The threat posed by massive discoveries of shale gas in the US and other countries means that crude oil prices could crash in the next year or two. A sensible government would have rushed head long to ensure it builds new refineries so that it can meet domestic demand and become a net exporter of petroleum products. Instead, the authorities are dragging their feet over such a critical issue,” said one analyst.


Macroeconomic Indicators

H1 2013
Real GDP (%)
Inflation (%)
MPR (%)
Average Interbank Rate (%)
Oil Price ($pd)
Oil Production (mbpd)
External Reserves ($’bn)
Excess Crude Account ($’bn)
Exchange Rate: Official (N/$)
155.75 – 155.77
Exchange Rate: Interbank (N/$)
Exchange Rate: Parallel (N/$)


Information from This Day was used in this report.