The beginning of the year 2015 portended a gloomy outlook for Nigerian economy. The reason was not far-fetched; the fourth quarter of the previous year had seen sharp slide in prices of crude oil which started in June 2014 when it was almost $115 down to $52 in January 2015, as a slowdown in global economic activity, but majorly robust global production exceeding demand created shocks in the oil market.
Before the downward trend, it had risen to up about $115. The result was that the economy was in dire straits, since the country’s economy runs mainly on the single commodity of oil. Forecasts that crude oil prices would dip lower turned out to be right as it is currently hovering around $37, whereas the country’s budget was predicated on oil benchmark of $65.00.
As oil prices continued to fall, Nigeria’s Excess Crude Account, the equivalent of the Sovereign Wealth Fund, plunged to $2.45 billion. The balance in the dollar component of the excess crude oil revenue account had depleted to about $2.45 billion in January 2015.
The new government of President Muhammadu Buhari after the general elections was faced with the burden of several months of unpaid salaries of workers by state governments. He did not mince words in saying that the country lacked money to run the country effectively. In a bid to help states ease the financial burden on them caused by drop in federal allocations, the government shared N391bn ($1.7bn) as soft loan facility taken from the Excess Crude Account (ECA) to the states under the Special Intervention Fund.
Collapse of oil price is taking its toll on the Nigerian economy. There is exchange rate volatility that has prevailed as about 90 per cent of foreign exchange earning for the country is tied to oil, and with shortened revenue in dollars terms, the naira has been under continuous pressure. Compounding the problem is the devaluation of the naira by the Monetary Policy Committee within the year.
Nigeria’s situation was further worsened by the delay of the current government which came into office on May 29 to appoint ministers as there was no policy direction. The lack of apparent policy direction of the government has left a lot of decisions floating. Investors have been cautious about making decisions. Some pulled out their funds in the capital and bond markets.
The central bank restricted access to foreign currency to stop a slide in the naira, effectively pegging it at N197 to one dollar. However, it is currently standing at N270 to one dollar at the parallel market. The huge disparity between two rates, expert say, has created room for great distortions in the market, which invariably promote rent seeking while discouraging any serious commitment to grow the real sector, and create more jobs. The country being a heavy importer of foreign goods, importers say, the policy is crippling their operations. Those that manage to bring in goods do so at great cost that inflation is prevalent.
Coupled with this is the Central Bank of Nigeria’s recent directive excluding some essential raw materials from the list of items valid for the Nigerian Foreign Exchange markets, which manufacturers say is a huge setback for creating employment. Also, there was the decision to stop cash foreign exchange deposits to forestall a dollar denominated economy and the increasing pressure on the nation’s foreign exchange market. It also reduced the annual and daily limit on the usage of naira denominated cards outside the country. Annual limit, which was initially $150, 000 was cut down to $50, 000, while daily card usage limit was brought down to $300 per person.
The Central Bank of Nigeria (CBN) has further reduced the Monetary Policy Rate (MPR) from 13 per cent to 11 per cent as well and the Cash Reserve Ratio (CRR) from 25 per cent to 20 per cent. The Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, explained that the committee took the decision following the weakening fundamentals of the economy, particularly the low output growth, rising unemployment and the uncertainty of the global economic environment
According to him, “The MPC was particularly concerned that the previous liquidity injections embarked upon through lowering of the CRR in the last MPC, has not transmitted significantly to improved credit delivery to key growth and employment in sensitive sectors of the economy. Rather, more credit was given to sectors with low employment elasticity.”
There is high unemployment rate in the country, which the CBN said it is concerned about, and is working hard to ensure increased credit delivery to the key growth sectors of the economy capable of generating employment opportunities and improving productivity and growth.
