Site icon Connectnigeria Articles

How The Fall In Oil Prices Could Impact Nigeria’s Economy

Unsplash

Nigerians have rarely gotten starker reminders of their connection with the rest of the world than they have in the past couple of months.

A global pandemic originating in far off China has swept across the globe, enveloping a majority of the countries on the planet, and inflicting tragedies in its wake. It’s finally arrived on Nigeria’s shores, with returnees from adversely affected nations being the main victims in these parts thus far.


Read more about Business


There’s another dark prospect lurking in the background- siding oil prices that threaten to shrink the country’s revenues. Nigeria had little to do with the nose-diving prices, but it may be hit much harder than the entities that triggered it. Again, events that played out thousands of miles away from our borders could impact our lives in significant ways.

It does look like a perfect storm. But how are these two problems related? And (as we like to ask) how will they affect the petty trader at our local markets—or other Nigerians for that matter?

COVID-19 and Oil Price Wars

It turns out that the plunging prices and the coronavirus pandemic are connected. But it’s not a straightforward relationship. So we’ll unpack that here.

The strain of the COVID-19 virus which the world is currently battling to suppress was first reported in China in 2019. From there, it spread to neighboring countries, and eventually reached Europe and the rest of the world via airline passengers coming in from territories that had recorded infections.

In the bid to stop the highly-contagious virus from spreading, authorities in various countries began announcing restrictions on social gatherings, work, and the movement of people. Among other things, this meant that industries that relied on petroleum-based fuels for power (especially airplanes, road automobiles, and other transport vehicles) weren’t using—or needing –nearly as much of those fuels.

The crude oil markets anticipated this fall in demand and reacted accordingly. Prices had already begun falling by February 2020.

But things were about to get worse.

Oil-producing countries wanted to push crude oil prices back up by reducing the amount of the product they sold to the international markets. However, two of the world’s biggest producers, Saudi Arabia and Russia, could not agree on a deal. As a result, Saudi Arabia backed out of the negotiations, said it would be supplying more oil, and offered the product at a discount.

The result was an oversupply of oil, to accentuate the already shrinking demand. Oil prices tumbled.

In January, Brent Crude (against which Nigeria’s crude oil price is tied) averaged $67 per barrel. By the third week of March, it had fallen to $24 per barrel.

In a nutshell, the price slide was caused by reduced demand. This weaker demand was itself initiated by the COVID-19 pandemic. But the price crash has been made much worse by the price war being fought between Russia and Saudi Arabia.

But How Does This Affect the Average Nigerian?

Remember, Nigeria is heavily dependent on its oil revenues. It gets most of its foreign exchange from crude oil sales.  If it has a steady inflow of forex to match the naira in its system, the naira will remain stable against foreign currencies. But if oil prices fall, its foreign exchange earnings will shrink, and forex inflows will reduce. The naira could eventually lose its value against foreign currencies.      

This may already be happening. In the first week of March, a dollar exchanged for about ₦360. By mid-March, it was selling for as high as ₦380. Some analysts believe there’s a chance it could cross well beyond the ₦400 mark if current trends persist.

If you were an importer, you would find your imports more expensive. And because Nigeria’s manufacturers use a lot of imported inputs, they will have to transfer the increased costs to the consumer in the form of higher product prices. You, the regular person on the street, will be paying more for a lot of things.

If the production costs escalate significantly, this may cause many businesses to run at a loss. Many will ultimately shut down.                

There’s another front on which the effects of falling oil prices will be felt. The Federal Government also needs oil revenues to fund its annual budget.

If the oil price is high, the government gets a good amount of revenue and can pay salaries, spend on infrastructure projects, and pay its debts. If the oil price is low, revenues will fall, and the government will struggle to meet these obligations.

In the worst case, public sector workers could lose their jobs. Government projects will be canceled. Contractors won’t get paid. And the ripple effect will ring through the economy, as people will have less to spend. Businesses get fewer customers and lower sales; if they are badly hit, they may even close shop.

A third front could be the oil industry itself. In 2016, it suffered a severe contraction due to reduced oil prices and revenues. This sector is strongly tied to several others, particularly the banking industry. There’s a danger that something similar to the 2016 scenario could repeat itself: the oil sector shrinks, and the banking sector’s loan to oil business concerns go bad. The result: banks may struggle to cut losses. In many cases, this involves the lay-off of a significant number of bank employees.


Find our comprehensive listings of businesses in Nigeria here https://businesses.connectnigeria.com/


Again, the ripple effect from a sagging oil sector will affect the entire economy (as it did in 2015-2016). The result could be another recession.

How Should Nigeria Tackle This?

The government is already attempting to address the impact of the COVID-19 crisis on the country. The CBN has announced a ₦1.1 trillion intervention package to keep the economy’s engines running. As the situation unfolds, it may unveil more measures.

On the fiscal side, the Federal Government has slashed its budget for the year 2020 by ₦1.5 trillion. Spending on infrastructure has been cut by 20% and recurrent expenditure by 25%. It has also barred MDAs from recruiting new personnel. An earlier government plan to borrow $22 billion for a range of projects has been shelved. 

Perhaps the most noticeable move by the current administration has been the downward review of the petrol pump price from ₦145 to ₦125. The NNPC can afford to do this because oil prices are much lower now. However, some analysts are warning that this decision has come too soon. If the naira loses more ground against the dollar, the reduction in the price of PMS could cost the government—and the country –a lot of money.

Most economists suggest that Nigeria should seize the present moment to let the naira ‘float’ and find its real market value. The CBN has deployed scarce foreign reserves to defend an artificial exchange rate. This only leaves the country with fewer dollars in its reserves. According to these analysts, the country could save more forex if the local currency was freed from its current ‘peg’.

They also advocate an end to subsidies. If the fuel price is determined simply by demand and supply, the government could save billions of naira and deploy the funds to critical infrastructure projects.

In the long term, Nigeria will have to wean itself off oil and diversify its revenue sources. Low oil prices could be the future normal, as countries across the world ditch fossil fuels for renewable energy. The present uncertainty may be the hard reset our nation needs to prepare for that future.

Featured Image Source: Unsplash


Did you find this article useful? Contact us: editor@connectnigeria.com

Exit mobile version