My article last Monday was on the coronavirus and why we should have been worried not just about the virus getting here but on its effects on international markets, specifically the market for crude oil. I am not a prophet but one of our worst fears happened even before the article could be printed. While trying to figure out a response to the fall in demand for crude oil because of the virus, OPEC plus (the fancy name for OPEC plus Russia) essentially fell apart. The two big fish could not agree on production cuts and the meeting deescalated into what now looks like an all-out price war. Russia essentially announced that everyone could pump as they liked as the deal was off. And Saudi? Well they pumped as the liked, ramping up production and offering steep discounts. As a result, crude oil prices fell over 30 percent to as low as $34 a barrel. Since Monday the United States has added fuel to the fire placing a travel ban on much of Europe and essentially guaranteeing that the global economy will weaken even further. Which again put downward pressure on crude oil prices. As at writing this the price was just above $33 a barrel but who knows what it will be by the time this is published.
Back home in Nigeria, as you might have guessed, panic hit. I watched part of the CBN’s roundtable tagged “Going for Growth” and you could almost see the panic in the room. Some even termed the day as Black Monday with lots of talk of emergency meetings and plans to respond to the “surprise” drop in crude oil prices. Although I do wonder how an event that happens relatively often could be a surprise. Also, what did the black colour ever do to anyone? Why the constant association with bad events? But that is a story for another day.
The panic hit the financial markets too. The Nigerian Stock Exchange continues to witness significant exits, like most other stock markets around the world. Nigerian debt prices continue to rise with our sovereign debt interest rate rising from about seven to ten percent. The exchange rate has also started doing like this and like that, but it is not me who will tell you what the black-market rate is.
So, how prepared are we for yet another oil price shock? On the fiscal side we are hopelessly ill prepared. The budget, with its expectations of a near 100 percent increase in revenue, was already unimplementable. Most of the capital expenditure was not going to be funded anyway with no capital releases this year already. This new oil price matter makes it even more unimplementable. All the talk of cuts is interesting because there is really nothing else to cut unless they want to start firing civil servants. In terms of buffers the excess crude account is virtually empty and the sovereign wealth fund is mostly not liquid after being incentivised to put its money in infrastructure. The option of using debt to manage for a while is limited too. Debt servicing costs already ate up 65 percent of all revenue in 2019 and our debt has already increased massively over the last five years. There’s not that much space for more without going insolvent.
On the monetary policy side, the foreign reserves were already falling at an alarming rate even before this oil price shock. Thanks to the CBNs fixed exchange rate policy. And of the $36 billion or so in reserves an estimated $12.5 billion is essentially owned by foreign portfolio funds who have indirectly loaned CBN US dollars and may call it relatively quickly. And of course, all the administrative procedures and FX windows and all that are still in place so the room for more administrative measures is also limited.
So, are we prepared for this round of oil price shocks? It appears not. The real danger however is that we will double down on the types of polices we implemented in 2015 and 2016 and that will torpedo the economy again. We are already hearing the same stories. “The exchange rate must not change” and “we must produce what we consume” and others. But panic not, a set of solutions is being crafted as I write to insulate Nigeria from this global turmoil. At the very least we have a readymade excuse: “It was not our policy that caused it. It was the coronavirus”.
NONSO OBIKILI
Dr. Obikili is chief economist at BusinessDay
