Continued oil price fall portends danger for Nigeria- FSDH research

By Kehinde Ibrahim, Lagos
THERE are increasing concerns that the over five-week long steady decline in crude oil price may have serious negative consequences for Nigeria, as economists at FSDH Merchant Bank Limited, Monday, posted what may be the likely impact on the country’s economy both in the short-to-medium term perspectives.
Crude oil is important to the Nigeria’s economy as the major source of revenue for the government and the largest supplier of foreign exchange to the country. The economists therefore project that a further significant drop in either the price of crude oil or production will directly pose a negative impact on the fiscal position of the country. It will also cause major macroeconomic instability, particularly in the exchange rate and inflation rate.
Oil money according to data obtained from the United States Energy Information Administration EIA Short-Term Energy Outlook STEO in its report for November 2018, crude oil prices declined in October at a faster rate than in any month since July 2016. Brent spot crude oil price declined by U$10 per barrel in October to close at U$75 per barrel.
Recall also that Bonny Light crude oil price declined by 16.01per cent in October to close at $73.34 per barrel. The price of Bonny Light crude oil dropped further to US$71.31 per barrel as at November 7, 2018. This represents a decline of US$16.35 per barrel from the highest price of $87.66 recorded in October 2018. The decline in oil prices is attributed to two major factors: the indication of a global economic slowdown, and the higher-than expected global crude oil supply. The International Monetary Fund IMF had revised its global economic growth rate forecasts for 2018 and 2019 down by 0.2 per cent; this revised forecast was published in the IMF’s October edition of the World Economic Outlook WEO.
Additionally, the expected drop in the global crude oil supply due to US sanctions on Iranian crude oil may not materialise, as a number of other countries are making arrangements to buy the Iranian crude oil.
Presenting the implication of all these on Nigeria’s economy, the economists at FSDH stated: “FSDH Research analysis of the First Half Year 2018 HY1’18 Foreign Trade Statistics released by the National Bureau of Statistics NBS shows that crude oil exports accounted for 80 per cent of the country’s total exports.
This follows a historical trend as, on average, crude oil exports between 2015 and 2017 accounted for 78 per cent of total exports. “Oil revenue represents a significant proportion of Nigeria’s revenue. Lower revenue will mean the government may not be able to undertake necessary capital expenditure and will hinder economic growth. “It may also lead to a devaluation of the currency because of a drop in the foreign exchange supply. A rising inflation rate will be associated with currency devaluation; and naturally, the monetary policy response to a rising inflation rate is to increase interest rates. “These likely scenarios will lead to an increase in finance costs for both companies and government. An economic recession is not far from these developments.
These were the events that happened in Nigeria from 2014 through to 2017. “FSDH Research notes that the crude oil market developments in 2018 and 2019 appear better than in 2017. The average price of Bonny Light crude oil in 2017 stood at US$55p/b, the average year till date in 2018 is $74.37 per barrel. “The EIA’s forecast price of Brent crude oil indicates that Bonny Light crude oil should trade above $70 per barrel in 2019”.
“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 in order to take proactive measures against unwarranted economic crisis in Nigeria. “Government at all levels must intensify efforts to implement policies that will grow the non-oil sectors of the economy”, the research further cautions.