Price Drop Puts Babangida on the Spot

The collapse of oil prices and OPEC's disarray have seriously weakened the economy of Nigeria. Nigeria counts on oil for over 80 percent of its foreign exchange earnings, making it the most vulnerable of OPEC's 13 members.

With some projections that world oil prices will remain low for the coming decade, Nigeria and half a dozen other oil-exporting sub-Saharan African countries will have to cut a billion dollars annually from their budgets. Africa's total oil export earnings have already plummeted from $22 billion and could drop to less than $10 billion.

Last year Nigeria's oil revenues were $10.1 billion, over 90 percent of the country's total annual income. In 1986, earnings from oil were projected to bring in $8.1 billion-based on Nigeria's OPEC quota of 1.3-1.4 million barrels a day with 1.1 million barrels exported and net government earnings of $20 a barrel.

Although oil prices slid downward, officials in Lagos vowed repeatedly that the Nigerian budget would not be scrapped. "The present battle of nerves cannot last too long," said President Babangida, adding that revision would be carried out only when the market had stabilized. Shortly afterwards Finance Minister Dr. Chu Okongwu said "whether the oil price falls to $10 or rises to $50, that is not going to make us unscramble the budget immediately." Petroleum Minister Rilwanu Lukman enjoined oil companies in Nigeria "to stick by us" during the "temporary" upset in the world market.

But the launching of the Fifth National Development Plan had to be postponed until 1987 as the result of the oil price drop and an oil sales agreement made with the oil companies in January had to be renegotiated almost immediately. Under the January agreement, companies were guaranteed a profit of $2 a barrel if prices stayed above $23. In return, the companies were to press ahead with a five-year exploration and gas development program and undertake to transport-or "lift"-some of the Nigerian National Petroleum Corporation's production. As oil prices plummeted, the NNPC was reported to be offering to maintain the $2 profit margin above a floor of $15 a barrel in a bid to increase liftings. But the slump in oil prices below $10 a barrel early in April made the promised profit margins unsustainable.

When oil prices collapsed around Easter, the basis of the budget was completely destroyed. Even though a slow rise in prices followed, pressure for a total budget redraft was intense. Chief of General Staff, Ebitu Ukiwe, told the press that the budget would be "adjusted," adding "we cannot spend what we do not have." But details of the `adjustment' were not announced.

According to Petroleum Minister Rilwanu Lukman, Nigeria earned more than $2.2 billion from the export of 126 million barrels in the first quarter of 1986. Although Nigerian production increased from an average of 1.2 million barrels daily in January to 1.5 million in March, revenue from sales fell from $818 million to $697 million. By April, when the oil price bottomed out, Nigeria was producing 1.6 million barrels a day, well above its OPEC quota.

Despite the price crisis Lukman announced in April that Nigeria would continue to expand its capacity to produce crude oil. The government's commitment to step up exploration was unchanged, he said.

Although falling oil prices have been partly offset by raising production levels, under current market conditions increasing production is not a solution.

During the oil price slide, Nigeria joined Algeria, Libya and Iran in calling for an end to the price war and a resumption of a production-cutting strategy to restore market stability. But the country would have been hard pressed to meet the 2 million barrel per day cut that OPEC members estimated was needed to bring collective output down to a ceiling of between 11 million and 14.5 million barrels per day.

Algeria, Libya and Iran were outvoted at the April OPEC meeting in Geneva when a majority of members, including Nigeria, agreed to set a ceiling of 16.7 million barrels a day. Current OPEC production was estimated then at 17.5 million barrels a day but the thorny issue of reallocating production quotas was not resolved.

Even if prices stabilize at around $15 a barrel, as is currently believed, if OPEC fails to resolve its internal disputes, another fall in prices below $10 a barrel could spell disaster for Nigeria.

The oil price collapse has made Nigeria's already crippling debt burden even heavier. Although the exact level of the external debt is a matter of debate, creditors assume the medium and long term debt to be around $10.8 billion. Of this amount, $7.5 billion is said to be owed to commercial banks, another $2.3 billion is reportedly insured under export credit guarantee and $1 billion is due to multilateral agencies. Organization for Economic Cooperation and Development (OECD) estimates put the total medium and long term debts higher, at around $14 billion.

The Nigerian government disputes its obligation to repay either of these figures, pointing to the Johnson Matthey Bank scandal and other fraudulent deals involving the loss to the country of huge amounts of foreign exchange. The "real" level of debt, or at least the one which will be honored, says the government, is much lower. Yet even the government's own figure for 1986 debt service commitments-$4.25 billion-now looks unsustainable with oil prices at their current low levels.

Ironically, the oil price collapse may have strengthened Nigeria's hand against its creditors. The banks' anxiety about the possibility of a Nigerian default has made them more amenable to negotiations over the country's debt. In the fall an 11-member steering committee representing bank creditors agreed to a 90-day moratorium on repayments of medium and long term debts, effective from April 1. It was thought that bankers might agree to rescheduling if a`realistic' exchange rate was set, with a monitoring role for the IMF. Finance Minister Dr. Okongwu was hopeful that a similar agreement with the Western creditors could be worked out. Softening Babangida's position in regard to the IMF, Okongwu said that an "understanding" with the IMF had not been ruled out. Western creditors, however, adamantly opposed a rescheduling prior to an agreement with the IMF and declined to make new credits available to Nigeria.

Longer term prospects are just as grim. Even if Nigeria manages to reschedule its debts, it may be unable to pay creditors in the late 1980s, by which time total external debt financing requirements may reach $23.4 billion.

Anxiety about the impact of the unstable oil market and its consequences for government economic policy has sapped business confidence. Nigeria's economic performance in the first quarter was sluggish in all sectors.

The effects of past and current rounds of austerity are arousing increasing labor unrest. After two years of quiescence among Nigeria's workers, a wave of labor disputes and strikes in the industrial and white collar ranks-many of them unofficial actions-may represent a new period of labor militancy.

More than 6,000 workers at the Peugeot Automobile Nigeria and Volkswagen plants struck over a pay and hours dispute late in 1985. Industrial action by workers at Dunlop Nigerian Industries led to a suspension of production earlier this year.

Public sector workers, especially railway and dock workers, increasingly are challenging the government's attempts at privatization. Lagos railway workers disrupted services at Nigeria Railways Corporation to protest delays in payment of wages. The workers claimed that money for their wages was being diverted to pay private contractors.

In April, 10,000 dock workers demonstrated in Lagos against the government's plan to abolish the National Cargo Handling Company and the National Dock Labour Board as part of its privatization program. The dockworkers' union maintained that the two bodies had improved the system of cargo-handling and working conditions on the docks.

White collar workers are also showing increasing militancy. Banking services in Bendel State were disrupted in March when members of the bank workers' union came out on strike in support of employees of the state-owned New Nigeria Bank who had been dismissed after a strike held six months earlier.

Mindful of the danger of another coup, the military regime will be keeping a watchful eye on the growth of such labor unrest. The government is more adept at managing public opinion than the previous regime under which most forms of opposition were suppressed. After conducting a debate on whether or not to reach an agreement with the IMF last year-which helped defuse discontent over austerity measures in the subsequent budget-the government has launched a year-long public discussion of Nigeria's political future. Babangida says his aim is a return to civilian rule by 1990. Some of the popular discontent over the worsening economic situation may be channelled into this "political debate."

The ur}derlying desperate economic problems remain. With no sign that world oil prices will revive in the coming years, the only way for Nigeria to weather the current crisis is to profoundly restructure its economy to reduce its dependence on oil. Already the government has announced substantial incentives for the promotion of nonoil exports, but with the world prices of most commodities depressed, the impact of such measures can only be limited. The collapse of oil revenues has brought Nigeria's debt crunch even closer. Full-scale devaluation and an agreement with the IMF may now be unavoidable. But whatever the outcome of the current crisis, the prospect for most Nigerians looks grim.

Dr. Nick Van Hear is a researcher and writer on Africa and development issues, based in London.