Nigeria's Economy In Trouble As Oil Price Crashes

Nigeria’s economy may be heading for trouble, as oil price crashed even lower at the weekend, thereby threatening the 2015 budget and fiscal plan.

The international price of crude hit a six-year low below USD40 per barrel with West Texas Intermediate crude oil futures as low as USD39.89, while Brent crude declined further to USD45.10 from previous week’s level of USD48.87 per barrel. Nigeria’s sweet crude is similar to the Brent.

It is envisaged that prices will crash even further once Iran begins to enyoy its international pardon by pumping more oil into the already saturated market.

This will spell more doom for Nigeria, which is producing less than its projected 2 million barrels daily, thereby increasing the cash crunch and liquidity flow in the economy, with many states still unable to pay salaries.

The steep decline in oil prices had in March this year forced the National Assembly to settle for USD53 per barrel as the oil benchmark price for 2015 budget, down from USD65 earlier proposed by the Federal Executive Council under ex-president Goodluck Jonathan. The government had earlier in the year effected downward review of the budget benchmark twice in response to sliding oil price from USD78 to USD73 and later to USD65. It even said it had planned for possible price fall scenarios of up to $50/barrel.

With this development, economists are expecting further downwards adjustments in the budgetary benchmark, revenue projections and ultimately expenditure provisions. Also, they expect further pressure on the value of Naira as the development has wiped off any accretion to the country’s Excess Crude Account.

According to the Global Chief Economist, Renaissance Capital, Mr. Charles Robertson, lower oil price will be painful for the budget. It means less money is available for much-needed investment in infrastructure.

Budget projections

The 2015 budget had envisaged federal government’s share to be about N3.6 trillion of total oil component revenue at USD65 per barrel, with estimated production output of 2million barrels per day.

At current oil price, the component accruable to the federal government would drop massively to less than N2.5 trillion, putting the entire budget in disarray. Evidently all the projected expenditure, Vanguard learnt, are already being curtailed in the recurrent expenditure provisions in the budget, while capital expenditure of N634 billion is completely dropped.

An economist with the Central Bank of Nigeria (CBN) told Vanguard that federal government may have abandoned the 2015 budget entirely and is now focusing on ordering the economy for 2016 budget and fiscal policy. He added, however, that in the interim, the apex bank would be battling with the external reserves and exchange rate pressures as a result of this development in the international oil market.

Analysing the current pressures on CBN over the external reserves and plunging oil revenue, economists at FSDH Merchant Bank, said: “Although the CBN may keep to its current exchange rate position, we believe that with the huge demand pressure in the foreign exchange market in the face of the declining oil price and unsold oil production, we are inclined to maintain our forecast exchange rates,” which is about N216/ USD1.00 in the official CBN window by next month.

The oil revenue situation appears more compounded as Nigeria’s ability to produce and availability of buyers have been on the negative since this year. According to OPEC, the Nigerian National Petroleum Corporation (NNPC) cut its July official selling price for Bonny light and Qua Ibo to 10-year lows relative to North Sea Brent, as an overhang of 15mb July cargoes were unsold. The OPEC added that loading delays also hurt certain Nigerian grades as refiners looked for more reliable alternatives.

Moreover, West African crudes were undermined by excess supply and relatively high freight rates for their cargoes making cheap North Sea and Mediterranean grades more attractive to some European buyers.

Vanguard