The price of oil (Brent crude) is currently above $90 per barrel, which is supposed to translate to increased buffers and stronger naira but this is not happening as Renaissance Capital, an emerging and frontier markets-focused investment bank, foresees the local currency falling to N450/$.
Data from the Central Bank of Nigeria (CBN) show that the daily crude oil price was $93.32 per barrel as of February 1, 2022.
Meanwhile, Nigeria’s foreign exchange reserves have declined to $39.98 billion as of February 3, 2022, while Naira is exchanging at N416.33 as of last Friday. Investors bid at the rate of N444 per dollar.
Responding to the development, Taiwo Oyedele, head of tax and corporate advisory services at PwC, said the combined effect of low crude oil production, which is below our OPEC quota, as well as the rising cost of petrol subsidy, have resulted in Nigeria incurring virtually more cost to import fuel products than what we earn from exporting crude oil.
The implication is that rather than benefit from rising oil prices, the country is bleeding with a huge impact on government revenue and foreign exchange reserves, which in turn escalates exchange rate risk and budget deficit, he said.
“Government must urgently reverse this worrying trend by addressing challenges to crude production and the lingering petrol subsidy quagmire,” Oyedele said.
The naira may be N465/$ this year and with oil at $90/bbl possibly N450/$, Charles Robertson, global chief economist, head of macro-strategy, Renaissance Capital, who delivered a presentation on the Emerging Markets Outlook and Opportunities in the Nigerian Capital Market on Thursday, February 3, 2022, said.
“Nigeria has a great amount of oil but not when it is divided by over 200 million people. Gulf countries sell 500 barrels of oil per thousand people every day, while Nigeria sells seven. That is why I maintain that oil is not going to make Nigeria rich,” Robertson said.
“Nonetheless, when the oil price goes up, it forces us to change our forecasts in a more positive way for the country. If oil prices are going to average $80/bbl this year and next, we are going to see growth of about 3 percent in 2022. And if oil stays at $90/bbl, we think we are getting growth of 4 percent,” he said.
According to Ayodeji Ebo, head, retail investment, Chapel Hill Denham, the current oil production is significantly low due to maintenance, pipeline vandalism, divestment by foreign investors and insecurity.
“As at December 2021, Nigeria’s crude oil production was at 1.2mbpd compared to the OPEC plus quota of 1.6mbpd, hence we are not benefiting from the upside in price,” Ebo said.
When compared to the budget production target of 1.8mbpd, the country is losing significant income on a daily basis, which will lead to a huge gap in the budget. This will lead to more borrowings and invariably, higher debt servicing.
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Nigeria’s currency has in the last 40 years depreciated in value by 99.85 percent per N1 million, according to StatiSense, a data consulting firm.
Data from the firm show that in 1981, N1 million was worth $1,570,105; 10 years after, In 1991, N1 million was worth $102,517, In 2001 the same amount of naira was worth $8,814, in 2011, it was $6,382 and 40 years after, in 2021, N1 million was $2,421.
In his outlook for 2022, Bode Agusto, CEO, Agusto & Co, an indigenous credit rating agency, said access to foreign exchange should be better particularly if the CBN was willing to deplete reserves a bit.
Dual exchange rates will continue in 2022, he said. The CBN will use improved oil and gas export revenues and maybe some of the external reserves to shore up the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate, which we estimate will close the year at about N430/$1. There will be continued pressure on the NGN/US$ rate in the parallel market. Unless the CBN injects some dollars into this market to dampen the pressure, the closing naira/dollar exchange rate in this market will be about 610/1.
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