Hard times loom as oil price dips by 37 percent

Crude oil
Crude oil

Nigeria’s economy appears headed for the rocks with oil prices in continued free fall, trading at $35.96 per barrel yesterday.

Brent Crude which is Nigeria’s oil grade equivalent in the international spot market has continued to tumble since last week following Coronavirus pandemicwhich has slowed demand for oil, especially from China where Nigeria sells much of its crude.

The fall worsened yesterday as Saudi Arabia and Russia appeared to have set the stage for another oil war.

Russian President Vladimir Putin announced on Sunday that present oil prices were sustainable for the Russian economy, and has the tools to react to any adverse results of the spread of the Coronavirus on the global financial climate.

However, some oil analysts are anticipating barrel prices as low as $20 within the year. Some experts have suggested that Russia’s move is intended to counter U.S. shale producers and hit back against the U.S. for targeting the Nord Stream 2 gas pipeline connecting Russia and Germany.

For Nigeria, government’s ambitious N10.6trillion budget for 2020 may suffer another setback as much of its cargoes remained unsold due to demand shortfall following the outbreak of COVID-19 in China and its spread across the world.

Reacting to the impact of falling crude prices over COVID-19 on the Nigerian economy, Dr. Muda Yusuf, Director General of Lagos Chamber of Commerce and Industry (LCCI) warned 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 said oil revenue accounts for about 85 per cent of foreign exchange earnings and is the major driver of accretion to the foreign reserves. The sharp drop in oil price and the associated adverse expectations will put fresh pressures on the reserves.

“Currently, (the reserve) is at all time low of $36.2billion as at 3rd March 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.

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For his part, Mr. Ayodeji Ebo, the Managing Director of Afrinvest Securities Limited, said there is cause for worry.

He said if the crisis of COVID-19 continues for some time, China’s demand for crude oil will drop, crude oil price will continue to nosedive and Nigeria’s revenue will drop while economic growth will stall.

“The issue here is that there is no solution in sight in terms of the corona virus 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 but most people will not wait until it gets to $30billion. And the rate at which it has been depleting on the average of between $300-$400 million per week is significant. If the global crisis in terms of corona virus persists for long then it will have a major impact on Nigeria’s revenue thereby affecting potential growth of our fragile economy.”

For his part, partner, Bloomfield Law Practice, Mr. Ayodele Oni, said there is big trouble for Nigeria, especially in the face of the recent approval of the Senate for the country to borrow about $22.7 billion which will further put the economy under pressure as it battles to service the loan under a low oil price regime.

He said the CBN in the wake of the development, may be compelled to devalue the naira if the trend continues over the next two month.

However, he said the falling oil price may be a low hanging fruit for the country as payment of oil subsidy will drastically reduce but warned that, such may not have much impact.

Meanwhile the sharp slump in crude oil prices to $30.2/barrel now threatening the implementation of the 2020 budget, President Muhammadu Buhari held a closed door meeting with the Finance Minister, Mrs Zainab Ahmed and the Central Bank of Nigeria Governor, Mr Godwin Emefiele on Monday to explore ways out of the quagmire threatening to throw the economy with another round of recession.

This was as economy experts have advised the Federal Government to immediately slow down on the execution of not too urgent capital projects to make funds available for recurrent spending and other contingencies.

Commenting on the development, a Developmental Economist, Mr Odilim Enwegbara told Daily Sun on phone that the current challenges call for prudence in spending.

“Crude oil has crashed and it’s because of coronavirus. Airlines and shipping companies and vehicles that consume petroleum products have drastically restricted their movements. So, demands are very low.

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