Between a coronavirus-induced slowdown in global economic activity and bruising ego battles of Russia and Saudi Arabia, the price of oil tumbled to $35.48 per barrel on Monday with possibilities of going as low as $20 per barrel. It immediately exposed the vulnerability of Nigeria where oil continues to be the primary determinant of economic activity. The 2020 budget received the first hit as it is predicated on an oil price of $57 per barrel.
The price drop raised spectres of the recession of 2016 caused by a similar drastic fall in global oil prices. Nigeria got out of it essentially due to the recovery of those prices. Talk of diversifying the economy away from its dependence on a single commodity has remained mere talk.
Price volatility is a characteristic of global commodities. Oil is regularly prone to shocks from two areas. They are economic or geopolitical. The March 2020 rapid drop owes to the convergence of the economic and geopolitical shocks.
The global epidemic of the coronavirus started in Wuhan Province of China in December 2019 spreading death and fear across the world. As of 9 March, there were over 111,000 cases globally. Global and domestic markets are in panic mode with stock prices crashing everywhere.
The UK recorded 319 positive tests for the disease on Sunday, 8 March following tests on 24, 960 people. Italy has the worst case in Europe with incidents and death toll rising daily. Italians have also been implicated in the spread of the disease to most other countries.
An Italian was the index case in Nigeria where a second victim was identified on Monday 9 March as one of those who had contact with him. Italy locked down 16million residents in its Northern province as the disease spread.
There were about 564 confirmed coronavirus cases in the US, majorly in Washington State and California. The disease has claimed 3,892 people since it commenced in December 2019. Experts say deaths worldwide from coronavirus exceed those caused by SARS. About 62,375 individuals have recovered from COVID-19 while more cases are popping up outside mainland China
China nexus is critical. China is the factory of the world, with coronavirus shutting down most of its operations. The slowdown led to reduced demand for oil. The geopolitical angle to Nigeria’s oil travails arose from the disagreement between Russia and Saudi Arabia, two of the world’s leading oil producers.
The oil price threat comes at an even more critical period for Nigerian than the 2016 case. Unlike then, Nigeria has run down its external reserves. Our reserves were $36 billion in February 2020 from $40.55 billion in October 2019. Our reserves had previously reached $63 billion.
Strong reserves are the best-known bulwark against the uncertainty of declining income arising from low oil prices. To add to Nigeria’s economic management dilemma, our debt stock has quadrupled since 2015. With the approval by the National Assembly of an additional loan of $22 billion that the federal government claims it needs, the country now has an uninspiring mix of low oil prices, reduced external reserves and huge debts.
Government economic agencies must now pursue policies other than those that depended on oil price stability. Coordinated fiscal and monetary stimulus is imperative. We have had a situation where the government has pursued simultaneously increased taxation and increased government spending rather than either. It has created confusion.
There is a need to outline clear policies that would stimulate the economy and promote investment in areas with a multiplier effect on activities. Diversification beyond oil while a medium and long-term strategy must commence now with clearly visible plans. The federal government must also grab the low-hanging fruits in several areas of inertia in policy, from oil and gas investments through power, infrastructure projects and the enabling environment for business.
