THE QUESTION: With OPEC oil at $30, is Buhari’s $38 budget benchmark feasible?

President Muhammadu Buhari presented a budget proposal of N6.08 trillion to a joint session of the national assembly on Tuesday, insisting on the oil benchmark of $38 per barrel.

The price is above the $30.74 per barrel rate of the Organisation of Petroleum Exporting Countries (OPEC), which coordinates petroleum policies of its member countries –Nigeria is one.

According to OPEC secretariat calculations, the price of a basket of twelve crude stood at 30.74 dollars per barrel on Monday, compared with $31.63 the previous Friday.

The price has fallen over $5 in the past one month, with Western Texas Intermediate (WTI) trading at $35.81 and Brent crude at $36.05 a barrel – its weakest since July 2004 – before recovering slightly to $36.56 early on Tuesday.

Udo Udoma, minister for budget and national planning, had initially presented the medium term expenditure framework (MTEF) to the federal executive council (FEC) benchmarked at $38 per barrel of oil.

The benchmark received criticism as being too optimistic for the falling oil prices, but the Nigerian senate sought to review it upward to $40 – a bid which seems to have failed.

CONSEQUENCES AND IMPLICATIONS OF $38 BENCHMARK

Earlier in the year, OPEC refused to cut output, maintaining its supply at over 30 million barrels per day.

With Iran bringing over 1 million barrels into the market in 2016, the oversupply is expected to hit record highs, driving crude oil price to epic lows across the globe.

Just last week, the US voted to lift a 40-year-old ban on its oil export, which means the country would also begin export of oil from any time in 2016.

The US decision would further drive the oversupply and pressure prices to lows never seen in the new millennium.

These dwindling prices would consequently reduce the amount Nigeria would generate from crude oil production in the coming year.

With Buhari’s budgetary benchmark at $38 per barrel, the president obviously expects Nigeria to generate N820 billion from oil in 2016, at a production level of 2.2 million barrels per day.

If Nigeria’s bonny light, which traded at $35.56 per barrel on Monday, trades for $30 in 2016, Nigeria would only be able to generate N647 billion from crude oil, adding N173 billion to the 2.2 trillion deficit for 2016.

IS $38 BENCHMARK FEASIBLE?

In his address on Tuesday, the president said the N6.08 trillion budget has an existing deficit of N2.2 trillion, which would be funded through international and local loans.

He added that the nation would borrow N900 billion in foreign debts, raising Nigeria’s debt profile to 14 percent of the nation’s gross domestic product (GDP), and N1.45 trillion in non-oil revenue.

If oil prices remain below the $38 benchmark, Nigeria would have to borrow more to fund the deficit, it is expected to create in the budgetary planning, hence raising the nation’s debt profile even higher.

According to the International Monetary Fund (IMF), Nigeria’s debt-to-GDP ratio as of 2015 stood at 12 percent, compared with 57 percent for Angola and 48 percent for South Africa.

With borrowing in excess of N1 trillion in 2016, Nigeria would have a larger debt burden, but the expansionary budget would survive.

Without sounding pessimistic, it appears tougher days are ahead. What are your thoughts?