Over-reliance On Oil Spells Trouble For Nigeria

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For those who believe that Nigeria’s oil reserve is everlasting, especially the few delusional individuals in government with large appetite for illicit wealth, it’s time for everyone to think again because, Nigeria’s economy is definitely going down.

The vast oil wells have spelt doom for Nigeria right from the start as our leaders constantly fail to realize that unless we properly invest the revenue from oil in other sectors of our economy, there will be a time when prices of oil will not be able to sustain our economy. Sharing money to state government to use and abuse, at will, without proper accountability will, someday, sum up to nothing. Obviously, the signs are here; and everyone will feel it.

The time has come, and whether we like it or not, revenue from oil will not sustain our economy. The United States will hardly ever buy our oil again, and prices will keep plummeting.

Below is an excerpt from the Economist magazine (November 29th-December 5th).

“When the price of oil tumbles, you should worry about a country that relies on the stuff for 75% of government revenue and 95% of exports. That country is Nigeria, Africa’s biggest economy. Earlier this year oil was selling at well over $100 a barrel. It is below $80 now. Nigeria’s currency, the naira, is diving; the central bank is shedding foreign exchange reserves in its defence. On November 25th it hiked interest rates by a percentage point to 13% (the first increase in three years) and said it had reduced its target rate for the naira (against the dollar) by a further 8%. That will not be the end of the story.

Since 2014 the Nigerian economy has expanded at an average rate of 7% a year – faster than the West African average. High oil prices spurred the boom; Nigeria exports 2m barrels a day, much of it especially prized by refiners for its low sulphur, which makes it easier to meet environmental rules. Unfortunately, most of the extra 3m barrels of daily production America has added since 2011 have been low in sulphur too. As a result, low sulphur oil has fallen even more dramatically in price than other sorts. The Economist Intelligence Unit, a sister company of The Economist, reckons that in 2015 Nigeria’s oil exports will bring in $67 billion, an 18% drop from last year, even though its output is rising.

As oil revenue has dropped, the naira has taken a beating. This year it has fallen by a tenth against the dollar and in recent weeks the slide has grown more rapid. The central bank has tried to stem its fall by selling foreign exchange reserves; these have dropped by nearly 20% in the past year and are now sufficient to cover just six months of imports, compared with 15 months’ worth a few years ago.

Nigeria’s long term economic prospects are good. In recent years industries other than oil, including manufacturing and communications, have begun to thrive. But according to Deutsche Bank, Nigeria needs an oil price of $120 a barrel to balance its budget – far above the current level. Big spending cuts would harm the economy. The likelier outcome, with an election looming in February, is that the government runs ever higher deficits, which will probably stoke inflation, currently 8.3%. That would put the naira under more pressure.”

The oil monarchies of the Gulf, by contrast, had their own depression in the 1980s and they have drawn their lessons from it. While the global downturn and the concomitant fall of oil prices has affected the Gulf states significantly, they have been better prepared to ride out the current crisis than most other countries around the world.

The recent fall in oil prices has by many measures been more spectacular than that of the early 1980s. Prices collapsed from U.S. $140 per barrel in summer 2008 to below $40 in early 2009, with only a partial recovery since then. The rapidity of the fall caught most market watchers unawares. The 1980s collapse was gentle by comparison, as prices declined gradually from about $40 per barrel in 1981 to $25 in 1985, reaching a temporary low of $10 only in 1986. It gave governments much more time to adjustor so one would think.

In fact, the 1980s slump led to government panic and private sector collapse in the Gulf, while the reaction to the recent decline has been much more measured. In the 1980s, governments slashed budgets, armies of local contractors went bankrupt, and large family groups found themselves insolvent, setting the stage for slow and painful consolidation and restructuring during the low-growth decade of the 1990s.

This time around, most Gulf Cooperation Council (GCC) governments are actually stepping up spending instead of curtailing it, and private business is growing more slowly rather than collapsing. Private banks and family groups that face trouble do so due to contagion from the international financial system rather than oil price gyrations or fiscal reversals.

According to Ed Cropley – Plunging world oil prices have dealt a blow to Africa far greater – in purely economic terms – than Ebola, setting back investment in exploration and plans to industrialize.

The highest profile victim so far has been Africa’s top producer, Nigeria, which was forced to devalue its naira currency by 8 percent this week after the central bank admitted dwindling reserves were making it hard to defend it.

In dollar terms, the devaluation knocked $40 billion off the value of Nigeria’s economy – considerably more than the $32 billion worst-case scenario the World Bank projected in October for Ebola’s economic impact on the entire sub-Saharan region.

Last week, the bank’s chief Africa economist said the latest assessments of the epidemic suggested the economic fallout might not be as bad as feared, and was likely to be closer to the $3-4 billion end of its projected range.

The same cannot be said for crude-backed African currencies.

Even after the Nigerian devaluation and a 100 basis point hike in interest rates, the naira came under more pressure, trading at a record low of 178.85 to the dollar.

The result is likely to be sharply reduced spending, a big increase in foreign borrowing, either through Eurobonds or syndicated loans, and possibly even an International Monetary Fund (IMF) bailout, as happened after the 2008 financial crisis.

“If there’s no support for oil prices, the budget deficit could be much larger than 7.6 percent and then you could see an IMF programme,” said Samantha Singh, an African currency strategist at Standard Bank in Johannesburg.

Although they have vast agricultural potential, the likes of Nigeria and Angola import nearly all their food and consumer goods, which will become more expensive, fuelling inflation and even raising the prospect of social and political unrest.

Weakening currencies also make imports of machinery more expensive, hampering Africa’s efforts to capitalise on above average growth rates by building industries to employ the millions of young people entering the labour market each year.

If we don’t learn from this one, Nigeria will never be the same again.

Written by Capt. Daniel Omale. Originally published on leadership.ng

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