Oil’s move to test the $40 mark is raising tough questions about the actions/ inactions of economic managers during the boom times as woes mount for the Nigerian economy.
Brent crude, the international benchmark, fell as low as $49.01 a barrel last Thursday, dropping below $50 for first time since May 2009.
The Finance Ministry has proposed austerity measures for 2015, while the CBN has hiked its benchmark interest rate to 13 percent. Most analysts believe the measures are too little too late, as the country failed to diversify before oil prices dropped 48 percent in 2014 after three years of the highest average prices in history.
The implications of oils fall for Nigeria are profound and include a possible ratings downgrade, increased naira pressure and fiscal constraints at the Federal and State levels that may lead to unrest, according to Meristem Securities analysts.
“The fiscal purse of the government has been failing the resilience test on account of lower crude oil export and prices. Over reliance of State Governments on FAAC allocation is likely to trigger protests at the state level,” Meristem said in a January 08 economic commentary.
The gross Federation account revenue – which has been declining since the sell-off in crude – was N1.034 trillion in June, N953.6 billion in July, N859.6 billion in August, N831.8 billion in September, and N743.6 billion in October, Central bank of Nigeria (CBN) data show.
Oil revenues accounts for up to 75 percent of the Federal budget but are much higher in majority of Nigeria’s 36 states.
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While oil continues to dominate FX inflows and federation account receipts its share of GDP at market prices in Q3 2014 amounted to just 10.3 percent, meaning the Finance Ministry has yet to fully tap Nigeria’s non-oil GDP of N70 trillion for revenues even as the Government celebrated the GDP rebasing that saw Nigeria overtake South Africa as the largest economy in Africa.
Government revenues are equivalent to 25 percent of GDP in South Africa, and 24.5 percent in Morocco but make up only 12.2 percent of Nigeria’s $464 billion economy.
“Something must be amiss…There is need for structural reforms in Nigeria,” said Ayo Teriba, CEO of research firm, Economic Associates.
“We cannot produce goods for exports in absence of rail reforms,” Teriba said.
The CBN which has struggled to meet dollar demand as oil prices collapse sold $450mn at the FX market last week, which according to Renaissance Capital economist Yvonne Mhango, is a signal that a new round of devaluation is on the way.
“The last time the central bank sold almost half a billion dollars at an auction was in October – which preceded a devaluation. We think another one is coming,” Mhango said in a January 07 note.
The negative sentiment towards Nigeria can be seen in stock prices which have fallen 12.2 percent this year, after dropping by 16.7 percent in 2014. Growth should slow to 5 percent in 2015 from 6.5 percent last year, according to the IMF.
“Capital outflows have continued and, with lower oil receipts, have led to sustained pressure on the naira,” Gene Leon, the IMF’s Nigeria representative, said in a press release last month to mark the end of its most recent Article IV consultations with the FGN.
While almost all global oil producers grew their dollar reserves during the past four years as oil prices averaged above $100 per barrel (Angola for example almost doubled its reserves to $28 billion), Nigerian FX reserves actually fell for the period, as economic managers for the period, failed to build fiscal buffers.
Data from the CBN show that official reserves decreased by US$2.3bn in December to US$34.5bn.
The CBN last month told banks to clear foreign exchange positions daily, having previously allowed them net-open positions of 1% of shareholder funds, in a bid to bolster the currency.
“We suspect that these circulars will, over time, prove to be porous. Our greater concern is the further depletion of offshore holdings of Nigerian securities in the face of pressure on the oil price and hence on the naira exchange rate,” FBN Capital analysts led by Gregory Kronsten, said in a January 07 note.
“Clearly the CBN cannot continue to draw down reserves at the rate of more than US$2bn per month for long,” Kronsten said.
