Economists are of the view that Nigeria’s
foreign reserves will be seriously depleted in the coming months if the
fall in global crude oil prices continues, thus posing a threat to the
economy, OKECHUKWU NNODIM writes
Crude oil has averaged $88 per barrel in the international market since the beginning of this month.
According
to analysts, the price decrease poses a threat to Nigeria’s economy as
the sale of crude is the country’s biggest source of revenue.
Professors
of Economics told out correspondent that if not reversed, the situation
would lead to liquidity squeeze in Nigeria, a development that would
make the citizens scale down on their expenditures.
Similarly,
analysts at Financial Derivatives Company, a firm renowned for global
economic analysis, stated that the fall in oil prices might lead to “a
definite slash in federal and state revenues.”
The
Chief Executive Officer, FDC, Mr. Bismark Rewane, stated in the firm’s
report for the month of October that the unexpected 22 per cent fall of
Bonny Light crude from $116 per barrel in June to $88 per barrel in
October had once again reminded Nigerians about its economic
vulnerability to exogenous shocks.
He
said, “Oil price, the single most important determinant of Nigerian
macro-economic stability, has declined by over 22.5 per cent in the last
quarter to $88 per barrel. The potential impact of this sharp drop is a
likely erosion of external reserves and a definite slash in federal and
state revenues.
“The analysis of the
vulnerability of the economy to this exogenous shock shows a sustained
fall in the price to $85 per barrel could lead to an external reserves
depletion of approximately $4.44bn.”
The
country’s external reserves had maintained a balance of $39bn for a
while, but declined marginally between August and October. It fell by
about $15m, down from $39.62bn recorded on August 26 this year, to
$39.47bn, which was the latest figure as recorded on October 2, 2014.
The
price of Nigeria’s Bonny Light crude oil as of September 24, according
to information from the Central Bank of the Nigeria, was $95.2 per
barrel.
The decline in oil prices is
coming at a time when the Nigerian oil and gas industry is encumbered
with several challenges, including crude theft, pipeline vandalism and
the non-passage of the Petroleum Industry Bill that seeks to overhaul
the industry.
Rewane noted that the
drop in oil prices was the reason why the next meeting of the
Organisation of Petroleum Exporting Countries in November would be one
of the most important for both the very rich and less wealthy oil
producers.
“At their next scheduled
meeting on November 27, the OPEC will seek to address growing concerns
bordering on stability in the oil market,” he said.
The
$88 is the lowest price level in over two years and the drop has been
largely attributed to a global demand growth slowing to its weakest
level in three years and buoyant non-OPEC supply led by the United
States’ shale boom.
The shale boom has been in its highest level in three decades.
OPEC’s
monthly report for September indicated an expected fall in demand by
800,000 barrels per day, bringing production down to 28.2mbpd from
30mbpd. The International Energy Agency, earlier this month also
forecasted a fall in OPEC production to 29.6mbpd in 2015.
Economists
noted that as OPEC struggled to cope with falling prices, a production
cut in response to the current conditions and the outlook for the oil
market might not exactly be on the cards just yet, but the prospect of
lower production from the cartel had brought to the fore more delicate
questions.
Rewane noted that some of
the vital questions might include, “How is a production cut, if agreed,
going to be distributed? Who would agree to a cut? And perhaps more
importantly, who is unlikely to agree?”
Analysts
at FDC noted that earlier fears that events in Iraq and Libya would
severely impact OPEC’s output, cutting global supply and lead to a price
rise, had proved to be overstated.
They
explained that oil prices were not alone in this plunge, adding, “They
have followed the general trend of other global commodity prices like
metals and agricultural products, which had dropped to their lowest
levels since the global financial crisis following concerns over slowing
growth in China, growing supply in key markets and a strengthening
dollar.”
A professor of Economics from
the Department of Finance, University of Lagos, Prof. Esther Adegbite,
told our correspondent that government agencies should brace for future
liquidity squeeze owing to the drop in oil prices.
She
said, “Since there is a drop in oil prices, this will lead to a drop in
government’s revenue. And if there is a drop in government’s revenue,
there is going to be a squeeze and tight monetary and fiscal policies.
The monetary and fiscal policies will be tightened; and so, there will
be need for adjustments in government expenditures.
“This,
of course, will be a downward adjustment, and if government is trying
to reduce its expenditures, it will likely affect every facet of the
economy. And all of us will have to scale down as a result of the
general tightening in the economy.”
Also
speaking on the issue, the Chief Executive Officer, Economics
Associates, Dr. Ayo Teriba, noted that Nigeria was not feeling the
impact of the decline in oil prices yet because the dollar had been
strengthened and the commodity’s prices might pick up soon.
He
said, “The oil price per barrel is in the US dollar and the dollar has
recently been strengthened, for example, against the pounds sterling and
the euro. So, if the dollar strengthens, the dollar price of crude will
fall.
“Three months ago, we were
talking $115, and today, we are talking $95; but the average for this
year may be around $100 per barrel. There is possibility for the price
to go up anytime soon.”
