Nigeria – The price of oil has taken its toll

 

 

A slump in world oil prices was recently reported, which affected producers across the globe; some more than others. The price of crude oil plunged to a seven-year low as trading opened on Monday. This came just days after the Organisation of Petroleum Exporting Countries (OPEC) meeting in Austria, where the organisation decided to ignore votes to cut supply and instead maintain its current production quotas. One of the countries who voted in favour of production cuts in a bid to ramp up prices was Nigeria.

It was announced that Nigeria’s naira touched a new record low of 183.05 against the dollar (1 pound gives you N287 – perfect timing for those who are sending money home to relatives for Christmas!). The drop in the exchange rate was caused by falling oil prices which in turn had a strong impact on oil producers abilities to generate tax revenue. As a result, foreign investor confidence is expected to decrease. This has been priced into the FX markets as Non Deliverable Forward curves for the USD/NGN. It is also forecasted that the Naira will continue to weaken into the new year. The US severed ties with Nigeria in terms of Oil importation earlier on in the year, opting to replace Nigerian oil imports with local US production. In April 2014, only 4.5 million barrels of Nigerian oil arrived at US ports. Seven years ago this amount was nearly 9 times larger at a record high of 40 million barrels a month.

The oil slump, combined with the ongoing problem of bunkering are primary signs of difficult times ahead for the Nigerian government for a number of reasons.  The Nigerian economy has expanded at an average rate of 7.11% a year this decade, surpassing the West Africa benchmark and more than twice the South African average growth rate (but less than their Ghanaian counterparts who experienced an average of 7.43%).  The sustainability of the Nigerian economy is heavily reliant on oil – 75% of government revenue and 95% of exports are related to the commodity. Getting the situation under control and adjusting budget expectations in light of what looks like new price levels for crude oil should be a priority for policymakers. According to Deutsche Bank, Nigeria needs an oil price of $120 a barrel to balance its budget which is very unrealistic especially as OPEC have decided against a reduction in oil production. Lets keep our fingers crossed for Nigeria and Africa as a whole that the situation improves.

By Joshua Bright (@capitalmoments)

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Categories: Business & Finance, In The Loop

Tags: , ,

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