By Amaka Akachukwu
The Nigerian economy has known no peace since crude oil prices plummeted to an oil time low of about $30 per barrel in the first quarter of 2015. Though the price of Nigeria’s major export has been picking up in recent weeks, it is still a far cry from its dream height of about $150 per barrel only a few years ago. Oil prices currently stands at $36.68 a barrel according to news reports. The new OPEC Reference Basket of Crudes (ORB) is made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).
The downward spiral of crude oil price keeps wrecking severe and devastating effects on countries and businesses such as Nigeria which rely heavily on the revenues accruable from the world’s most traded commodity as they are beginning to feel its brunt. Looking at the current state of the country and its economy, the cries of woe outnumber the shouts of joy. The major determinants of oil prices are the market forces of demand and supply. In simple terms, it covers a broad range of factors mostly market expectations and economic growth. The implication of the crumbling oil prices on the Nigerian economy could be analyzed from different perspectives.
Non exporting oil countries such as China, India and Japan stand to gain significantly from the decline in the prices of crude oil (as it would mean cheaper energy to drive these economies). Oil-producing countries like Nigeria, Venezuela and Russia will bear the brunt of the collapsing prices as they are already facing difficult challenges in sustaining their economies due to a major revenue shortage.
The crash has left Nigeria standing on thin ice, since its biggest importer, U.S. discovered and began to explore shale oil and gas, causing lacklustre demand and excess supply. Matters were only made worse when the US, Nigeria’s major oil trading partner lifted an embargo for them (US) to start exporting their own abundant crude oil.
For a country like Nigeria that relies largely on oil (over 85 per cent) as its major source of revenue, the slide, has hit various aspects of the economy like a thunderstorm. The nation is currently facing one of its most volatile exchange rate regime. 95% of Nigeria’s foreign exchange earnings are tied to oil and with shortened revenue in Dollar terms, the Naira is currently under continuous pressure.
“Though the CBN and the Presidency have resisted a legion of forces and refused to devalue the Naira from its present level of 198 to the Dollar. Market forces and those described by the government as economic saboteurs have forced the parallel market spread to 322 to the Dollar. Indeed, earlier in 2016 it got to the scandalous level of about 400 Naira to the Dollar. Nigeria thus earns less revenue from oil and gas; exports and imports of household items are now more expensive, with the burden being passed on to hapless Nigerians.
Also with the current declining oil prices, that means Nigeria might not be able to add additional revenue due to pressure from states that also run high recurrent expenditure. It might also be difficult for FG to save funds in the sovereign wealth fund, considering the austerity measures of the times. Growth in the external reserve is expected to slow down due to the falling of crude oil thereby causing stagnation on the savings of the nation.
Unless there is a drastic change such as downsizing personnel, reduction in overhead costs, capital expenditure performance will suffer a major threat due to low oil prices. Government will have to strive to keep its deficit within the limits of the fiscal responsibility act whilst ensuring it meets its daily obligations to the country and its citizens.
Contrary to popular belief, the public sector is still the largest employer of formal labour and with cuts around government expenditure due to crashing oil prices, creation and employment opportunities for new jobs will continue to decline. The private sector will have to lead the way for employment opportunities in Nigeria but they too are facing tremendous pressure as access to foreign exchange has become extremely difficult for the procurement of vital machinery, spare parts and raw materials due to the CBN policy barring 41 items from being imported with CBN-sourced FOREX.
There is already severe job cuts and project deferral in the oil and gas sector of the economy. Oil companies constantly explore crude with large sums of money, these crude oil might eventually go to waste following the supply glut and falling oil demand across the globe. That further means that expenditure will not match up with revenue, this in turn will lead to further downsizing in order for oil companies to stay afloat. Also, industry analysts have stated that if the slide in oil prices persists, it would affect the investment decision of the international oil companies planning to embark on huge offshore projects in the country.
Another major effect on the country’s economy will be debt servicing which may possibly experience a rise; especially foreign debts. Nigeria will need more funds to cover its budget deficit (difference between accrued revenue and expenditure).
Another effect on the country’s economy due to the fall in crude oil prices is inflation. With the crash of the Naira at the parallel and the rise of the Dollar from the crude crisis, foreign trade is not in any way favoring both consumers and traders, who are paying so much for goods they will ordinarily purchase at far less prices. To this end, traders are left with the problem of fixing and gaining little profit margin amid the spiking price of the Dollar against the Naira.
Another major effect is there will be a possible delay or total demise of on-going infrastructural projects. Major projects which have already began either at the local, state and federal level will witness a delay or outright cancellation. This is due to the lack of adequate funds to execute the projects. In other words, embarking on infrastructural projects like; road constructions, boosting water and electricity, in the face of the protracted oil price plunge, may become a wild goose chase.
News about billions of looted funds being recovered by the federal government may however provide short-term relief for the Nigerian economy if properly channeled but the long-term solution lies in refocusing of the country from a mono-product exporter to a multi-product exporter. In addition, our manufacturing sector needs to be revived so that the country stops importing the things that it is well endowed to produce. For instance, Nigeria has no business importing petroleum products with its status as the world’s 5th largest oil producer. The oil price crash could therefore turn out to be more of a blessing than curse if the government and people of Nigeria learn the right lessons and take the right actions accordingly.
