THERE are strong indications that more trouble awaits Nigeria as crude oil price fell to $46.31 per barrel, $11 below the 2020 oil benchmark of $57 per barrel, with experts predicting dangerous days ahead for the economy.
More so, Nigeria’s ambitious N10.6trillion budget for 2020 may also suffer another setback as many of Nigeria’s cargoes remained unsold due to shortfall in demand and also due to the outbreak of COVID-19 in China and its spread all over the world.
According to experts, the slump in oil price by 10 per cent is bad news for Nigeria’s economy, as this will lead to more pressure on the naira, while also making it very difficult for the Federal Government to fund the budget.
In 2020 alone, the oil price has collapsed by a third. It reached almost $69 per barrel in January, before the virus outbreak, just before plummeting to one-year low around $50 a barrel last week and a little over $46 on Friday.
Major oil traders warned that prices could tumble further if members of Organisation of Petroleum Exporting Countries (OPEC) fail to take action without Russia’s support, and predicted oil price low below $45 a barrel for the first time since the market began to recover from the last price crash in 2016.
Global oil prices plummeted to levels not seen since mid-2017 on Friday after the OPEC oil cartel failed to strike a deal to steady the market against the impact of the coronavirus by reining in production.
Traders are struggling to sell West African crude oil as demand from China stalls and European refiners balk at purchases because of weak margins.
About 70 per cent of April-loading cargoes from Angola and Nigeria are yet to find buyers, a marked decline from the normal pace of sales.
The unsold lots will be competing against millions of barrels that were slated for export this month but have yet to be purchased.
Reacting to the impact of the falling crude prices and the outbreak of the COVID-19 on the economy, Dr Muda Yusuf, Director General of Lagos Chamber of Commerce and Industry (LCCI), said the sharp drop in crude oil price could lead to dislocations in the 2020 budget
According to him, “this sharp drop in revenue could cause significant dislocations in the budget, especially for an economy already grappling with challenges of weak revenue performance.
“There is also the revenue effect of the coronavirus which is related to the drop in oil price. Oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings.
“With the current scenario of tumbling oil price, a drastic reduction in the revenue of government may become inevitable in the near time.
“This has implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted.”
He added that development and the associated adverse expectations would put fresh pressure on the reserves.
“Currently, (the reserve) is at all time low of $36.2billion as of March 3, 2020. This outlook will weaken investors’ confidence. It will generate speculative pressures on the currency. It will result in the depreciation of the naira exchange rate. It will trigger inflationary pressures, increase production and operation costs for businesses and It will weaken purchasing power and ultimately undermine the welfare of the citizens,” he said.
He argued that global supply chain has been severely affected as China, which is the second largest economy in the world, is a major supplier of inputs for manufacturing companies around the world.
“Nigeria is not an exception to the experience. Many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs.
“This has implications for capacity utilisation, employment generation and retention and adequacy of products’ supply to the domestic market. There is also an implication for inflation,” he said.
Corroborating Yusuf, a business consultant, Dr Vincent Nwani, explained that the signs of a drop in the price of oil had been on the horizon even before the coronavirus infection broke out, but the government chose to ignore them.
According to the former Director of Advocacy at the Lagos Chamber of Commerce and Industry (LCCI), “We have seen this coming since December, and we sounded the warning that the future of our country is at stake.
“The failure of OPEC to arrive at a consensus to cut oil production by 2.1 per cent yesterday [Friday] due to Russia dissenting positing is bad business for Nigeria because the Brent is currently selling at 41 and 42 dollar per barrel down from about 70.
“This is not favourable to Nigeria’s 2020 budget because our budget has pegged oil price at 56 dollar per barrel, meaning the current oil price is lower than what our budget had pegged it. The implication of this is that Nigeria is going to run at a very heavy deficit with increased pressure on the local currency and may lead to naira devaluation in the next few months.
“For a country that depends on oil for foreign exchange, it is really bad news for our economy.”
On his part, Mr. Ayodeji Ebo, the Managing Director of Afrinvest Securities Limited, said there was indeed cause for worry.
He said if the crisis of COVID-19 continued for some time, China’s demand for crude oil would drop. Crude oil price would continue to nosedive, while Nigeria’s revenue would drop and that would stall economic growth.
“The issue here is that there is no solution in sight in terms of the Coronavirus and it is affecting demand for crude oil globally, especially in China. If it is further prolonged then it will have negative consequences on Nigeria in terms of revenue and implementing the 2020 budget will be a major challenge.
“It means deficit would increase, and as a result, if you are unable to finance most of the capital expenditure that you have, then you don’t expect much growth in the economy. There is cause for worry because if this is sustained for some months, the CBN will have no other choice than to devalue the naira.
“This is because once the reserve crosses below $35billion, foreign investors will begin to retract. Though the CBN threshold is $30billion, most people will not wait until it gets to $30 billion. And the rate at which it has been depleting on the average of between $300 and $400 million per week is significant,” he said.
“If the global crisis in terms of coronavirus persists for long then it will have a major impact on Nigeria’s revenue thereby affecting potential growth of our fragile economy,” he declared.