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Faltering oil prices set naira, budget on risky path

By Chijioke Nelson (Asst. Editor, Finance/Economy) and Femi Adekoya
11 December 2018   |   4:23 am
Faltering crude oil prices have put the nation’s local currency, the 2018 budget implementation and the fragile economic growth on a crisis path...


Faltering crude oil prices have put the nation’s local currency, the 2018 budget implementation and the fragile economic growth on a crisis path.

Already, the near-convergence of all rates at N360/$, except the official exchange rate of the Central Bank of Nigeria (CBN), has been distorted, with each creating a wide gap, as the parallel market settles for N366/$.

Also, the CBN spot rate lost 0.02 per cent (5 kobo) to close at N306.85/$, while in the investors and exporters FX Window, the naira lost N1.06 to close the week at 365.16/$.

Yesterday, Brent Crude price sustained a renewed volatility at $58.96 per barrel, even as a ready-made market for the product remains uncertain, sending a disturbing signal to the foreign exchange market.

Nigeria’s 2018 budget, at over N9 trillion, benchmarked crude oil price at $51 per barrel. But with reported shut-ins, leaving it at around 1.94 million barrels per day (mbpd) against the projected 2.3 million mbpd and the dwindling prices, projected deficits will widen.

Unfortunately, the ensuing exchange rate differential would reintroduce imported inflation and huge distortion on price stability, worsening the economic growth projection currently at 1.9 per cent, which the budget earlier put at 3.5 per cent.

An analyst, Lukman Otunuga, said Nigeria is again losing immediate gains in the temporary trade truce announced between the two largest economies in the world – United States and China.

“The naira has yet again struggled to benefit from such welcome market conditions with prices hovering around N370 per dollar on the parallel market.

It is becoming clear that the naira’s stability against the dollar was the product of repeated interventions by the Central Bank of Nigeria and with falling oil prices weighing on the naira’s peg against the dollar, complicating the CBN’s effort to defend the naira on the parallel market, further weakness seems to be on the cards.

“The falling oil prices are poised to negatively impact government revenues and the implementation of the 2019 budget. While the short-term outlook for the Nigerian economy might look discouraging, confidence in the nation will most likely receive a boost in the medium to longer term if increased government spending ahead of the elections next year stimulates economic growth.”

Already, Nigeria has again lost about N425 billion in estimated budget shortfalls in the month of October due to lower revenue from both oil and non­oil sources, an affirmation of the oil price volatility and shallow diversification.

Of the shortfall, faltering oil receipts at N422.13 billion in the month of October represented a loss of N218 billion as well as 11.5 per cent below the preceding month’s receipt of N477.06.

The Nigerian Bureau of Statistics (NBS) said this was caused by the drop in the average price of crude oil and declining production arising from the shutdown of some pipelines.

The Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, said the declining oil price is not good for the economy, especially now that the country is exposed to capital flow reversals.

For him, the budget implementation, increased debt deals, as a result of possible rise in fiscal deficits and the attendant consequences on the general economy, are hugely involved.

“Crude oil is important to the Nigerian economy as the major source of revenue for the government and the largest supplier of foreign exchange to the country. A significant drop in either the price of crude oil or production will directly have a negative impact on the fiscal position of the country.

“It will also cause major macro-economic instability, particularly in the exchange and inflation rates. Despite these fairly positive developments, we are aware that the crude oil market is very volatile. Therefore, it is crucial to learn from the events that happened in 2014 through to 2017, to take proactive measures against an unwarranted economic crisis in Nigeria. Governments at all levels must intensify efforts to implement policies that will grow the non-oil sectors of the economy,” he said.

Another analyst, Egie Akpata, said the renewed uncertainty in oil price would definitely create more work for CBN, especially in stabilising the local currency and maintaining interest rate at this level.

He expressed the optimism that the apex bank is capable of containing the issue, especially as the current leadership has till June to either leave office or continue, despite oil price challenge.

“The only point of expectation of new things, for me, would be if there is change in either government or CBN leadership. Otherwise, as it stands, the focus is on price stability and there are sufficient tools, in my assessment, to achieve it,” he said.

Also, notwithstanding the growth recorded in the nation’s third quarter Gross Domestic Product (GDP) as released by the NBS, stakeholders in the real sector have described the progress as slow, fragile and vulnerable to disruptions in the global oil market.

Though the non-oil sector’s contribution to the GDP in the quarter under review was higher than that of the oil sector (90.62 per cent: 9.38 per cent), some stakeholders worry that dependence on oil revenue might disrupt the system if oil prices drop below $50 per barrel.

Indeed, the nation’s GDP grew by 1.81 per cent (year-on-year) in real terms in the third quarter of 2018.

Compared to the third quarter of 2017, which recorded a growth of 1.17 per cent, there was an increase of 0.64 per cent points.

The second quarter of 2018 had a growth rate of 1.50 per cent, showing a rise of 0.31 per cent. Quarter on quarter, real GDP growth was 9.05 per cent.

In the quarter under review, aggregate GDP stood at N33.36 trillion in nominal terms. This performance is higher when compared to the third quarter of 2017, which recorded a GDP aggregate of N29.37 trillion, thus presenting a positive year-on-year nominal growth rate of 13.58 per cent.

This growth rate is higher, relative to growth recorded in the third quarter of 2017 by 2.88 per cent points and higher than the preceding quarter by 0.01 per cent points with growth rates of 10.70 per cent and 13.57 per cent.

Analysing the data, the Director General of the Lagos Chamber of Commerce and Industry (LCCI) Muda Yusuf said the performance remains sluggish, going by the rate of the expansion, and that the slow growth is a reflection of lingering challenges in the economy.

In terms of sectoral performance, he noted that the agricultural sector is able to record improvements despite the challenges of flooding and insecurity in the sector.

He added that while harvest might have aided growth, there is the need to improve productivity, as the sector is still dominated by smallholder farmers.