Coronavirus:How drop in oil price affects Nigeria’s economy

Despite the absence of reassuring words from the Federal Government, Nigerians have cause to be concerned, as the global spread of coronavirus, also known as COVID-19, and the continuous drop in the price of crude oil in the international market would definitely take a heavy toll on the Nigerian economy.

Specifically, it is no longer news that oil and gas account for over 90 per cent of Nigeria’s foreign exchange earnings and more than 60 per cent of the country’s oil earnings, and presently, with developments in the international market, oil and gas, Nigeria’s major revenue-earner is currently under threat. Because of the spread of coronavirus, many countries, such as China, Japan, India, France, Italy and Germany, among others, have curtailed movements of their citizens, through shutdowns, cancellations, lockdowns, and restrictions placed on large gatherings. These restrictions are taking toll on these countries, forcing a slowdown in the economic activities of these countries and also negatively affecting their consumption pattern, especially their consumption of petroleum products. The combined drop in petroleum consumption in these countries is what is currently forcing a slowdown in global demand, especially the demand for crude oil.

With this massive decline in crude oil demand, there is presently a supply glut, which is excess supply of crude oil in the market with little or no buyer. In line with the law of demand and supply, when supply of a commodity far exceeds the demand for the same commodity, the price of that commodity declines.

Realising the destabilizing effect of coronavirus on the global crude oil market, member countries of the Organisation of Petroleum Exporting Countries, OPEC, had a few days ago, met with a few non-OPEC member countries to agree on a production cut, that would see major crude oil producers cutting their export output by an additional 2.5 million barrels per day. The output cut would have curtailed supply of crude oil in the market, bringing it below existing demand; which would have also affected the price of crude oil positively. Participating countries at the meeting failed to reach an agreement, so the output cut deal failed to materialize. As a result of the failed output cut deal, the fight for international market share of crude oil between Saudi Arabia and Russia was renewed, and as both countries, among other countries, increased their crude oil output, the price of crude oil had only one way to go — down. In addition, in its recently-released Foreign Trade Statistics Report for the Fourth Quarter of 2019, the National Bureau of Statistics, NBS, had stated that the major buyers of Nigeria’s crude oil are India, Spain, Netherlands, France and South Africa, among others. These countries have recorded cases of the coronavirus and the disease had impacted their economies seriously. A pointer to the challenges Nigeria is faced with is the fact that as at last week, it was reported that Nigeria is currently struggling to find buyers for about 55 vessels of its April crude oil output.

Implications for Nigeria To this end, the Nigerian economy is placed at a disadvantage, as the country would struggle to find buyers for its crude oil output and would have to settle for low prices, when it eventually gets buyers. This would cause a major strain on the country’s finances and its budget, especially as the country is relying heavily on crude oil sales to finance the 2020 budget. In particular, the Federal Government had in the 2020 budget, adopted a crude oil price benchmark of $57 per barrel, on a daily crude oil production estimate of 2.18 million barrels and an exchange rate of N305 per dollar. Currently, the price of Nigeria’s Bonny Light has dropped to $33.73 per barrel, 40.8 per cent below the $57 per barrel budget benchmark. From the $57 per barrel benchmark and 2.18 million barrels of crude oil per day output, the government is targeting oil revenue of N2.64 trillion for 2020. It is also targeting non-oil tax revenues of N1.81 trillion and other revenues of N3.7 trillion. The government is projecting a budget deficit of N2.18 trillion in 2020, including drawdowns on project-tied loans and related capital expenditure. Therefore, with the decline in crude oil price, the ability of the country to meet its N2.64 trillion oil revenue target has been curtailed by about 40 per cent, while the country’s budget deficit is expected to rise by about 40 per cent. With the inability of the country to meet its revenue target, it would face serious constraints in its ability to pay workers’ salaries, as well as carry out most of the projects listed in the budget. With all these challenges, to avoid a major crisis or shutdown of the country, the government might resort to drawdown of the already depleted excess crude account or outright borrowing, both locally or internationally, to meet its obligations to its workers and to undertake significant infrastructure projects. This would worsen the country’s debt situation and plunge the country into another debt trap with a high risk of default, as the country’s foreign reserves faces the risk of depletion due to an expected devaluation of the naira. With the low foreign exchange earnings from the already-challenged crude oil sales, monies in the foreign reserves would be used to finance import of other critical goods, thereby, leading to the depletion of the naira, as well as making it difficult for the Central Bank of Nigeria, CBN, to effectively defend the naira. With the decline in the value of the naira, price of goods and services in the country would rise sharply; inflation rate would skyrocket, unemployment would increase and poverty rate in the country would worsen. Commenting on the implication of the falling crude oil price on the Nigerian economy, a Nairobi-based investment analyst, and Chief Executive of Rich Management Limited, Mr. Aly-Khan Satchu, stated that the Nigerian currency, the naira, is already gone, and it was just a question of when. Satchu noted that Nigeria currently has between $16 billion and $18 billion sitting in short term certificates, such as OMO bills, adding that with the uncertainty posed by the falling oil prices, the country would be at risk when most of these foreign investors chose to cash out of the country. He said, “There is about $16 billion to $18 billion sitting in short term certificates, OMO, where investors are getting double digit in dollars. The premise of that returns is that the currency remains stable.” With the crude oil price falling more than 20 per cent since the beginning of the year, the entire premise of that double digit return has been knee-capped. Most of the investors would be looking to hit the eject button as soon as they can. “You are going to have a situation at the CBN, on where there are going to find $16 billion to $18 billion in the next 12 months as these investors seek to cash out. Therefore, it is a very precarious situation. “Nigeria will have a forced devaluation foisted upon it by the market and by this unstable situation. Already Moody had downgraded Nigeria because of the huge amount of the country’s money sitting in short-term certificates in Nigeria. The naira is gone, it is just a question of when.” From the foregoing, the consequences of the coronavirus-induced oil price fall would be dire on Nigeria and if not properly managed, Nigeria might plunge headlong into another recession in the next couple of months, and this time, the coming out of the recession would be a prolonged and steep climb.