With Nigeria’s N10.59 trillion ($35billion) 2020 budget certainly doomed with oil prices falling to $30 per barrel in the international market on Thursday, experts say Nigeria’s capacity to service its humongous debt of over $83.88 billion has become a herculean task. NewTelegraph reports
…as oil prices fall below $57pb benchmark
…diversification of economy remains a slogan
Debt service conundrum
At an oil price of over $50 per barrel, Nigeria was servicing its debt with over 60 per cent of its total annual revenue. However with the Federal Government set to borrow a fresh $22.7 billion, and the oil prices hoovering around $30 per barrel on Thursday, Nigeria’s revenue is set to fall by about 50 per cent even as debt service ratio to revenue would increase further
Collapse of oil prices takes toll on economy
The international oil benchmark, Brent crude, fell below the $57 per barrel per barrel 2020 budget benchmark last week Saturday fell to $30 per barrel on Thursday.
Brent, which rose to as high as $70 per barrel in January, has been on a downward trend since the coronavirus broke out, posing a serious threat to Nigeria’s 2020 budget.
The budget, which was signed by President Muhammadu Buhari in December, was based on projections of oil production of 2.18 million barrels per day with an oil price benchmark of $57 per barrel.
The Federal Government is looking to generate N2.64 trillion oil revenue, which is 32.34 per cent of expected total revenue for this year, with non-oil revenue projection being N1.80 trillion.
On Thursday WTI fell $2.04, or 6.2 per cent, to trade at $30.95 per barrel. Earlier in the session it traded as low as $30.02. International benchmark Brent crude fell $2.51, or 7 per cent, to trade at $33.26 per barrel
Nigeria has reported only two confirmed coronavirus cases, but there are fears the fallout from the global outbreak could debilitate Africa’s biggest economy.
Finance Minister, Zianab Ahmed said on Monday that the government would review the budget downward after the prices plunged far below the level envisioned.
“It is very clear that we will have to revisit crude oil benchmark price that we have of $57,” Zainab Ahmed said after a hastily convened meeting with President Muhammadu Buhari.
“There will be reduced revenue in the budget and it will mean cutting the size of the budget.”
Where the savings will come from in the record $34.6 billion spending plan agreed for this year remains to be seen.
A committee including Ahmed is set to report back to the President with a way forward in the coming days — but room for manoeuvre may be limited.
Before the latest collapse in oil prices, Nigeria was already struggling to boost growth after emerging in 2017 from its worst recession in decades caused by the last major crude slump.
Sloganeering diversification of the economy
Pledge by the Buhari administration to diversify the economy has remained a mere slogan as the country continues to rely on oil for some 90 per cent of its foreign exchange.
Last month saw the International Monetary Fund lower its 2020 growth forecast for Nigeria to 2 per cent on the back of the lower oil prices.
“Nigeria has not learnt some lessons from its past in terms of diversifying its revenue base,” said Ayodeji Ebo, managing director at Afrinvest Securities in Lagos.
Afrinvest on Monday estimated that the fall in the oil price would cause a revenue shortfall of over 55 per cent.
Also speaking, President of Dangote Group, Aliko Dangote said: “We have been singing about diversification, but we haven’t done anything yet; we need to make our country a producing country and time to act is now. Nigeria imports everything except fuel and iron rods and we don’t have much infrastructure.”
He described the crude oil price crash as a good opportunity for Nigeria to get serious with economic diversification.
Dangote spoke on Wednesday in Abuja at a consultative roundtable meeting organised by the Central Bank of Nigeria (CBN) in Abuja, with the theme: “Going for Growth 2.0”.
He listed two ways to diversify the economy, which he said could be achieved through agriculture and manufacturing.
He, however, noted that: “To achieve inclusive growth, there must either be backward integration or import substitution.”
Dangote said: “To an extent, our economy is great because we have a good local market, but we need to improve on our exports. It is disturbing that as a country, we cannot produce what we consume.
“Only in 2019, our export was about $42 billion, which is not sustainable and we cannot continue like this. To have a population of 200 million and grow at 2.7 per cent cannot be sustained.
“Another area the government needs to look at is our cost of doing business in Nigeria, which is too high. Also, the government must look at improving power supply and infrastructure because these are the areas that will boost the SMEs.
“As it is, it is impossible to diversify without taking consideration of certain things, they include interest rate, long term funds and the support by the Central Bank to create enabling environment.”
He said that instead of focusing on imports, Nigeria can adopt the Ethiopian government style where they encourage imports of machines to come and produce in the country rather than just importing directly.
“I was shocked to hear that customs received N1.3 trillion duties last year. This simply shows that the economy is not working because if it is, Customs won’t take that as Customs duties,” he added.
According to him, it is unacceptable for a big country like Nigeria to continue to depend on importation.
Dangote noted that diversification was possible, but long term funds with low interest rate should be given, as well as support by the CBN on foreign exchange.
According to Ebo if the standoff between Soudi Arabia and Russia is prolonged drop for crude and coronavirus continues to batter the global economy then Nigeria could be heading for major problems.
“If we don’t come up with policies to salvage this situation then there is the possibility for Nigeria to slip back into recession,” he said.
While the outlook looks bleak there appear some crucial differences that could help Nigeria avoid some of the pain from the 2014 oil crash.
Also, speaking, former Chairman of Stanbic IBTC, Atedo Peterside took a look at CBN’s policy inconsistencies that threaten the stability of the macro-economy as the apex bank continues to seek to defy the odds by simultaneously pursuing a low domestic interest rate regime which according to him clearly cannot coexist with high inflation and naira exchange rate stability in the face of collapsed/collapsing oil prices and an insatiable and uncontrolled appetite for foreign currency loans. “This unsustainable policy mix has spooked investors (local and foreign), thereby making it increasingly likely that the Nigerian economy slides back into a recession, unless you quickly embark on some course correction,’ he warned.
Devaluation of Naira
Still, the spiralling economic headache will ratchet up pressure on the naira as talk has been building of a potential devaluation.
So far the Central Bank has stuck firm on supporting the currency despite diminishing dollar reserves as it looks to stave off letting the naira go free again for the second time since 2016.
But the plunge in the oil price might just push the authorities to let the naira slide.
“The CBN governor has indicated to the market that there are two variables that will determine the next move for the currency: oil prices and the level of the reserves,” said Omotola Abimbola, an analyst at Chapel Hill Denham investment bank.
Crude prices are now well below the level Nigerian officials were hoping for and the reserves have slipped towards the key $30 billion threshold set by CBN chief Godwin Emefiele.
“The threshold hasn’t yet been reached as reserves are at $36 billion,” said Abimbola.
“But this is a shock and I expected the Central Bank wouldn’t let reserve drop below that level before taking action.”
CBN’s reserves have decreased by 20 per cent in the past two years to the lowest since November 2017, and may soon reach the $30 billion threshold set by Governor Godwin Emefiele for the country to consider devaluation, Jason Daw and Phoenix Kalen, strategists at Paris-based Societe Generale SA, wrote in note on Monday. The central bank may start adjusting currency policy before it reaches that point, they said.
Naira fundamentals are on an unsustainable trajectory and under current external conditions, especially lower oil prices, the risk of devaluation is “very elevated,” the SocGen strategists wrote. “The combination of a current-account deficit — previously due to strong imports but now being compounded by weak exports — portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira.”
The naira extended its decline against the dollar on the parallel market on Thursday, as demand for the US currency surged amid a plunge in crude oil prices occasioned by the impact of Coronavirus.
The naira, which had weakened to N375/$1 on Wednesday from N365 the previous day, dropped to between N415 and N420 per dollar in some parts of Lagos yesterday, before appreciating to N375/$1, traders said.
According to market sources, the depreciation of the local currency, since the beginning of the week, is due to a surge in demand for the dollar as many traders are expecting foreign exchange scarcity as a result of the crash in crude oil prices.
The development led to many operators on the parallel market hoarding dollars and refusing to sell to clients on Thursday.