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 which is $57 per barrel.
More so, Nigeria’s ambitious N10.6trillion budget for 2020 May also suffer another setback as many 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.
In 2020 alone, the oil price has collapsed by a third. It reached almost $69 per barrel in January, before the virus outbreak, before plummeting to one-year lows around $50 a barrel last week and just over $46 on Friday.
Major oil traders warned that prices could tumble further if members of Organization of Petroleum Exporting Countries (OPEC) fail to take action without Russia’s support, and predicted oil price lows 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 percent of April-loading cargoes from Angola and Nigeria have 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.
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Reacting to the impact of the falling crude prices and the outbreak of the COVID-19 on the Nigerian economy, Dr. Muda Yusuf, Director-General of Lagos Chamber of Commerce and Industry (LCCI) stated that 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 percent of government revenue and about 85 percent of foreign exchange earnings. With the current scenario of tumbling oil prices, 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 the capital projects will be severely constricted.”
He said oil revenue accounts for about 85 percent of foreign exchange earnings and is the major driver of accretion to the foreign reserves. The sharp drop in oil prices and the associated adverse expectations will put fresh pressures on the reserves.
“Currently, (the reserve) is at an all-time low of $36.2billion as of 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 the 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 an acute shortage of raw materials and intermediate inputs.
“This has implications for capacity utilization, employment generation and retention and adequacy of products’ supply to the domestic market. There is also an implication for inflation,” he said.
On 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, the crude oil prices will continue to nosedive, Nigeria’s revenue will drop and economic growth will stall.
“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.
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“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-$400million per week is significant. 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.”
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