Nigeria: Oil Price Quakes Send Jitters to Nigerian Economy

Nigeria naira
15 March 2020

There is an ominous signal in the Nigerian economy following the sudden oil price crash as a result of Saudi Arabia's oil war and the coronavirus pandemic which has snowballed into a global economic slowdown.

Health concerns over the outbreak of the virus have resulted in the closure of factories in China, one of Nigeria's largest trading partners, and reduction in imports, global travel and cancellation of foreign exchange deals, business travels, conferences, sporting events, among others.

Besides the effect of coronavirus, oil prices also fell after Saudi Arabia announced massive discounts to its official prices in response to OPEC allies' failure to reach a middle ground over deeper supply cuts.

The sudden oil price slash has triggered a warning from the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, who said Wednesday that Nigerians should prepare for tough times in at least next three months ahead.

After Monday's reduction in crude oil prices to about $34.97 per barrel, Kyari said at a consultative roundtable on the Nigerian economy that his warning was based on his experience on the workings of the global oil market.

Prepare for hard times

He said: "Prepare for trouble for at least three months, even if the price of crude oil goes back to $58 per barrel, the situation will still be tough, because there is a backlog of production hanging that has to be resolved.

"What that means is that we are going to have the impact of this low crude oil price for some time, the oil market is highly unpredictable, nobody knows what is going to happen tomorrow.

"There are many forecasts. We said oil will be sold at about $60 per barrel this year. But we are already having $22 per barrel. Nobody knows what will happen next tomorrow."

Kyari noted that as a result of the importance of oil in the global economy, when crude oil prices collapse in the international oil market, everything else collapses.

But he also added that Nigeria has the capacity to meet the expectation of raising her oil production to three million barrels per day and increase reserve from the average of 36 and 37 billion barrels to 40 billion barrels in the next two to three years.

The crisis, he said, is also affecting countries like Iraq and Saudi Arabia which reduced their prices by $8 and $5 respectively, but the two countries, he noted, could afford to maintain low production costs unlike Nigeria whose production processes involve about $15- $17 cost per barrel.

"So, when a country's crude oil is selling for $30 per barrel, and circumstances are forcing the country to drop the price by $8, it means in the market the country will be selling for $22 per barrel, that's a massive problem.

"That can be tolerated in some production environments like Saudi Arabia where their average production cost is about $4 to $5 to the barrel, but, not in Nigeria," he said.

Truncated budget benchmark

President Muhammadu Buhari in December last year signed a N10.50 trillion national budget for year 2020. Oil production was pegged at 2.18 million barrels per day, with a price benchmark of $57 per barrel. As it stands from the recent oil price slash, the benchmark cannot or may not finance the projected revenue for the year.

Budget review, looming recession

The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, told journalists that the 2020 budget might be reviewed downward.

"We're concerned because it does have an impact on revenue and at the current crude oil price of 53 percent is below the budget bench mark.

"We're studying the situation and when the budget was passed, we committed to do a mid-term review. We'll do the mid-term review and if the revenues are so significantly affected, we'll have to do some revisions in the budget by way of budget adjustment," she said.

Zainab Ahmed described the oil price slash as a shock, saying it was never expected, adding that the development was a wake-up call and Nigeria must begin to look beyond oil now.

"We must take opportunities this impact of coronavirus has provided for us. We are working to strengthen micro-economy and we are also making moves to provide fiscal incentives for Small and Medium Enterprises (SMEs) to grow," she said.

Experts say since Nigeria makes most of its foreign earnings from oil, with the price at about $30 per barrel, a recession is looming in the country.

Senate reacts

Reacting to the development following a point of order raised by the Senate Leader, Abdullahi Yahaya, the Senate constituted a joint committee to engage relevant ministries on the oil price crash. President Buhari had also set up a committee to find ways to escape the imminent recession.

Yahaya commended the government for setting up the committee and stressed the need for the Senate to emulate.

He said: "We need to engage a lot of our committees so that they will be ready at any point in time to engage the committees that are set up on the executive side.

"We hope this crisis will not last for long but if it does, we have to prepare for it. I'm just raising this for us to formally prepare for eventualities and uneventualities."

Senate President, Ahmad Lawan, recalled that the Senate passed the MTEF, FSP and budget on the oil benchmark price of $57 per barrel - which, he said, had crashed.

"As a parliament, we need to be proactive and continue to be up to date with the situation so that we are also able to take a decision when it will matter for us to take a decision," he said.

He then suggested that a joint committee be set up to protect whatever would be the situation for Nigeria to implement the budget in the way and manner that would impact the lives of Nigerians.

"This committee will continue to engage with people in government as well as people outside of government where we can be abreast with all the necessary information.

"So, the committees on Finance, National Planning and Appropriation will now form the joint committee and the finance committee will be the lead committee. You will engage with those in government - the ministry of finance, ministry of national planning and any other ministry that you feel you need to have engagement with for necessary information.

"Our purpose will be the same with the executive that we are able to control the situation because if crude price is $31, that is almost $26 off the shelf from what we budgeted and that is so significant and can affect the implementation of the budget," he added.

Panic over value of naira

The slash also sent jitters on the value of the naira, but the Central Bank of Nigeria (CBN) quickly on Thursday night said it had enough foreign exchange reserves to maintain the current value of the nation's currency.

It said it had set security agencies on the track of currency speculators who were causing panic in the market.

"The Central bank of Nigeria (CBN) wishes to note with displeasure, the rumours and speculative activities of unscrupulous players in the foreign exchange market, borne out of the impression that the CBN is on the verge of devaluing the Naira, and triggering panic in the FX Market. These rumours are false, unwarranted and calculated to serve their dubious and selfish ends.

"We therefore wish to state as follows:

"We have begun a robust and coordinated investigation in collaboration with the Nigerian Financial Intelligence Unit (NFIU) and related agencies to uncover the unscrupulous persons and FX dealers who are creating this panic, and the full weight of our rules and regulations will be meted out to them, including, but not limited to, being charged for economic sabotage;

"For nearly four years, the CBN has successfully maintained relative stability in all segments of the foreign exchange market, which has enabled investors, households and other economic agents to plan and to conduct their genuine foreign exchange transactions with relative ease;

"The introduction of several foreign exchange management measures side-by-side with complementary interventions in food production and manufacturing has drastically reduced food importation, which hitherto constituted a large chunk of the pressure on the foreign exchange market;

"The size of Nigeria's foreign exchange reserves remains robust and comfortable, given the current realities of Nigeria's genuine and legitimate FX demand.

"As such, the CBN remains able and willing to meet all genuine demand for foreign exchange for legitimate transactions; and

"For the avoidance of doubt, the CBN is also working with the fiscal authorities to properly and accurately dimension the immediate and expected impacts of the coronavirus in order to respond comprehensively and at the same time, ensure a sound and stable financial system conducive for job creation and inclusive growth.

"In the light of current circumstances and macroeconomic fundamentals, the CBN has not devalued the Naira.

"Consequently, the CBN will invoke the full weight of applicable sanctions on any persons and authorized dealers found to be involved in such disruptive and speculative market behavior."

Experts predict further price slash

"We believe the OPEC and Russia oil price war unequivocally started when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years," Goldman Sachs analyst Damien Courvalin said in a note to clients.

"The prognosis for the oil market is even direr than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus," the firm added.

Goldman cut its second and third quarter Brent forecast to $30 per barrel, and said that prices could dip into the $20s.

This drop in oil prices cuts at least $40m of revenues from Nigeria daily production projection of two million barrels (N12.24bn), our reporters gathered.

Depleting foreign reserve

Since the oil prices began to plummet, Nigeria's foreign exchange reserve decreased to $36.38bn in February from $38.10bn in January of 2020. With the recent development, analysts say Nigeria's external reserve may have dropped to less than $30bn.

There is also the corresponding risk of foreign portfolio investors taking away their investments. If this occurs in excess of $10bn it might be wiped off the foreign reserve, a situation that would force Nigeria's economy into a recession.

The cascading effect of the drop in oil prices will significantly impact state finances also. Most states might be unable to even keep the recurrent expenditure side running. An economic expert, David Aku of the University of Nigeria Nsukka, said both the states and federal government would have to borrow to pay salaries.

Naira may still crash - Experts

Devaluing the naira is just a matter of time at this point, other experts said. It would be recalled that the CBN Governor, Mr. Godwin Emefiele, had said in London in 2019 that if oil prices dropped to less than $45/barrel and external reserves dropped to less than $30bn, the CBN would be forced to devalue the naira. Prevailing conditions point to that direction. The government cannot augment budget funding with tax and other non-oil revenues as even these sources have been significantly impacted by the coronavirus.

Shipping activities have been reduced drastically and flight operations are impacted negatively by almost 60 per cent.

Statistics show that in 2019, debt servicing took about 50 per cent of the total revenue. Thus, if oil prices don't rally, government revenue would be wiped off by at least 50 per cent and this might force government to default in debt servicing or borrow to pay salaries if debts must be serviced, experts said.

A Senior Research Analyst at FXTM, Lukman Otunuga, said: "At this point in time, it is difficult to pin-point where the floor is on oil which has depreciated over 43 per cent since the start of 2020, and this is bad news for many emerging market energy producers, including Nigeria."

He also said besides the CBN's challenge to keep the naira strong, questions would be raised over Nigeria's ability to effectively implement the 2020 budget.

"If severely depressed oil prices hit export earnings, reduce government revenues, weaken the naira and stoke inflationary pressures, Nigeria's economy will be under threat in 2020," he said.

Dr. Boniface Chizea, the CEO, Bic Consulting Services in his reaction, said: "At this point, we have to wait, because the situation is dynamic. We are facing an emergency situation."

He said analysts had predicted a low point of $26 per barrel, that would be more than half of the $57 benchmark for the budget.

Also speaking, Dr. Aminu Usman, an economist at the Kaduna State University, urged the government to adjust its spending.

He said the unexpected outbreak of coronavirus may affect Nigeria's tax revenue as a result of a drop in productivity.

He said a budget review may consider increasing borrowing or eliminate projects and some aspects of the recurrent expenditure considered non-essential. Perhaps those might also lead to job losses, he added.

He said the drop in revenues would have adverse effect on budget implementation considering that 30 per cent of the funds needed to implement the 2020 budget would be borrowed.

He said the relevant government agencies must do more to increase non-oil revenues to make up for declining oil revenues.

Dr. Usman also reiterated the call for the government to diversify the economy from oil, which at the moment accounts for 90 per cent of the nation's foreign exchange earnings.

He said the government should approach the National Assembly to legislate on savings for unforeseen drop in revenues as the country is witnessing now.

A Senior Research Analyst at FXTM, Lukman Otunuga said: "At this point in time, it is difficult to pinpoint where the floor is on oil which has depreciated over 43 per cent since the start of 2020, and this is bad news for many emerging market energy producers, including Nigeria."

He also said besides the CBN's challenge to keep the naira strong, "questions will be raised over Nigeria's ability to effectively implement the 2020 budget which has set the benchmark for Oil at $57 - with an Oil revenue goal of N2.64 trillion. If severely depressed Oil prices hit export earnings, reduce government revenues, weaken the Naira and stoke inflationary pressures, Nigeria's economy will be under threat in 2020."

Another financial analyst, Dr Boniface Chizea, CEO, Bic Consulting Services in his reaction said: "At this point, we have to wait, because the situation is dynamic. We are facing an emergency situation."

He said analysts have predicted a low point of $26 per barrel, that would be more than half of the $57 benchmark we used for the budget and that would be a mess.

Meanwhile, policy makers and central banks have been taking measures to bolster their economies against disruption caused by the Covid-19 outbreak, the latest being the Bank of England that unexpectedly cut interest rates by half a percent on Wednesday.

Buhari harps on diversification strategy

President Muhammadu Buhari said the external challenges had highlighted the need to continue to implement measures that would enable growth in other sectors of the nation's economy and reduce dependence on earnings from crude oil.

He said they had also served to reinforce the importance of ensuring that Nigeria is self-sufficient in the production of strategic goods.

He said: For these objectives to be achieved, the vital role of the Nigerian private sector cannot be disputed or overemphasized.

"I am delighted to note that we have made some progress in our diversification plans and in creating an enabling environment for the Nigerian private sector to thrive.

"In the agricultural and manufacturing sectors, we have seen substantial improvements in the cultivation and processing of key staple commodities such as rice, maize, cotton and tomatoes.

"We have also worked to improve access to finance for businesses in the agriculture and manufacturing sectors. Access to credit is often cited as a constraint to the growth of farmers and small and medium sized businesses. Over the past 10 months, we have seen significant improvements in credit to support continued growth of our economy.

"I am aware that lending rates by banks to farmers, small businesses and manufacturers have been lowered over the same period. These measures along with aggressive efforts at rebuilding our road, rail and power infrastructure will help to reduce the cost of doing business in Nigeria and promote faster growth of our economy." Buhari said the recent slump in crude oil prices had affected the government's ability to meet the infrastructure and human capital needs.

More From: Daily Trust

Don't Miss

AllAfrica publishes around 800 reports a day from more than 130 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.