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Nigeria assumes $25/barrel in its new budget

Today, Friday, the President of Nigeria, Muhammad Buhari, may have signed the revised federal budget, according to the tweet of Bishr Ahmed, a Presidential Aide.

Revised Nigeria budget revenue is based on the assumption of $ 25 a barrel as an oil price, which is a very conservative price compared to current prices, but this price was agreed in Parliament, the National Assembly, and the Senate in discussions in April and May after the oil price collapse in March. Zainab Ahmed, Minister of Finance, Budget and National Planning, summarized the matter, saying: “A price of $ 25 per barrel, production of 1.94 million barrels, and an exchange rate of 360 naira per US dollar has been approved.”

In the discussions with Nigerian legislators and politicians in the past three months, the minister insisted on reducing the budget that was initially proposed due to the collapse of oil prices; Therefore, the discussions focused on the “revised budget”, which was approved by Parliament, the National Assembly, and the Senate on June 10-11.

The Minister’s efforts resulted in reducing the price of oil on which the budget was built from $ 57 a barrel, which was proposed at the beginning of March to $ 25 a barrel, and reducing oil production from 2.18 million barrels per day to 1.94 million barrels per day. Nigeria will borrow from the International Monetary Fund to cover the budget deficit.

It is clear from the budget numbers that Buhari was to sign today that they are prepared from April and May, and do not reflect reality. 

The prices of $ 25 a barrel are much lower than the current and expected prices, which range between $ 41 and $ 43 a barrel, but the assumed production is 1.94 million barrels per day, which is greater than the current production which reached 1.5 million barrels per day last May, according to the monthly report of (OPEC), and 1.58 million barrels per day in June, according to (SB Global), which is higher than the scheduled quota that Nigeria should abide, which is 1.41 million barrels per day. 

Since Nigeria exceeded its production quota in May and June, it must make additional reductions so that its production is less than 1.4 million barrels during the summer months; to compensate for the increase in May and June.

But with a simple calculation, we find that Nigeria’s revenues from producing 1.4 million barrels per day at 42 dollars per barrel will achieve higher returns than the production of 1.94 million barrels per day at 25 dollars per barrel. 

Here lies the problem: If increasing Nigerian production does not reduce prices, Nigeria has a great incentive to increase production as long as oil prices are above $ 40 a barrel; it can significantly reduce the budget deficit, especially if exchange rates remain the same.

On June 10, Nigeria, in a statement quoted by Reuters, head of the Nigerian National Oil Company, Mele Kiyari, pledged to cut production and stick to its production share, and to make additional cuts to compensate for the increase in production in May and June, but this will only happen in the middle of July, that’s five days from now!

The suffering of Nigeria is evident in the decline in the oil surplus fund by 98% in five years, from 2.2 billion dollars to 72 million dollars only. This information came from Minister Ahmed in a meeting with the National Economic Council two days ago, according to Nigerian media. 

Fund funds come when the price of oil on the market is higher than the price of oil on which the budget revenue is built, and part of these funds is used when the market price is lower than the price used to calculate the budget revenue; so it is closer to a savings fund.