The impact of falling oil prices on Nigeria 

The chaotic depreciation in oil prices has left the Naira noticeably vulnerable with the currency weakening drastically against the Dollar at 385 in the black markets during the month of February.

Oil prices have ventured to painfully low levels for an extended period and the growing expectations over possible production cuts between OPEC and non-OPEC members have manufactured an explosively volatile trading environment.

Recent reports of a potential output freeze did leave investors quite dissatisfied, and this punished the Naira further as market participants had already acknowledged that the only way to curtail the excessive oversupply of oil was a production cut.

As of now, sentiment remains bearish towards the Nigerian economy and the Naira may be open to further losses as oil prices potentially sink lower.

This dampened sentiment has left Nigeria’s stock markets depressed and the pain of falling oil prices continues to erode optimism which has consequently renewed a wave of risk aversion across the board.

Most major Nigerian stocks have followed a negative path since April 2015 and may be set to decline further amid global woes that have exposed the Nigerian economy to downside risks.

Any rebounds viewed in the stock markets may be a technical relief rally which should offer bears an opportunity to send prices lower. Investor risk appetite towards riskier assets remains soured and as such should sabotage any given opportunity for a solid recovery in the Nigerian stock markets.

Amid the steep declines in oil prices the Central Bank of Nigeria (CBN) has been under immense pressure to devalue the Naira in a bid to re-establish some financial stability within the Nigerian economy.

This has gone as far as the International Monetary Fund (IMF) and prominent figures in Nigeria pressing for the nation to devalue the currency in a bid to prevent a deeper recession, but President Buhari has remained defiant on the idea, and cited the risks of a devaluation punishing the poor and consequently boosting inflation.

Although the president of Nigeria offers a valid point towards the risk of devaluing the Naira, this same weakness may encourage Nigerians to buy locally manufactured goods which in turn may be the first steps to boosting economic growth.

Keeping in mind that Nigeria is an oil export dependent nation which relies heavily on oil revenues for over 75 percent of its government revenue; this depreciation in oil prices has had a destructive impact on government expenditure with the common man feeling the pain. It has become increasingly hard for the Nigerian government to implement its budgets with many civil servants losing employment as there are not enough government funds to pay workers. The situation has escalated further with the cost of falling oil prices passed onto citizens with electricity rates hiked by 45 percent in the month of February which only renewed concerns on how serious this economic crisis has become.

The extremely volatile exchange rates have made international trade and investment notoriously difficult for Nigeria because of the growing uncertainties and lingering exchange rate risks. If Nigeria is unable to invest or receive investments this may have an adverse impact on GDP growth which already follows a negative path and is set to decline further amid the falling oil prices. Despite all the efforts implemented by the Central Bank of Nigeria to counter the Naira depreciation the single currency has lost value against major trading partners and the government must act briskly before the situation escalates out of control.

Low oil prices may be here to stay for an extended period and although this consequently paints a gloomy outlook for the Nigerian economy in the longer term, the government can act now to cushion it from any future hard landings. A painful Naira devaluation may be the first step to recovery with the systematic diversification away from being so heavily oil dependent and using the remaining government revenues to grow other sectors of its economy. Nigeria has proved resilient in the past and may prove resilient once again if takes these bold first steps in a mission to reclaiming lost stability.

 

Lukman Otunuga, Research Analyst at FXTM