Nigerian economy nears breaking point as militants add to FX woes

Nigeria’s economy is nearing  breaking point as a new round of militancy in the oil rich Niger Delta, combined with FX shortages, threaten to snuff out any recovery in economic output after growth fell last year to the lowest levels since 1999.

On Friday a previously unknown group of militants who call themselves the Niger Delta Avengers, claimed responsibility for the previous day’s attack on Chevron’s off-shore facility and threatened to extend their activities to Abuja, the Federal Capital.

The country’s oil production fell to the lowest in 20 years after an attack on Chevrons offshore oil facilities by militants knocked out 90,000 barrels a day of output.

The near 70 percent slide in the price of commodity which earns Nigeria over 95 percent of its dollar revenues had already led to FX shortages and capital controls that hurt businesses and undermined growth.

President Muhammadu Buhari in a bid to kick-start growth, on Friday signed into law a N6 trillion ($30bn) expansionary budget, which is unlikely to have much economic impact.

“In an ideal world, Nigeria’s economic diversification and fiscal stimulus efforts would not be constrained by the shortage of FX.  However, given current circumstances, as much as the authorities hope to boost growth through counter-cyclical spending, this is unlikely to be as effective as might be the case if FX were not a constraint,” Razia Khan, Standard Chartered Bank’s Chief economist for Africa said in response to questions.

The country’s foreign reserves have fallen to less than $27 billion, the lowest since 2005. The International Monetary Fund (IMF) expects economic growth of 2.3 percent this year, the weakest in a decade.

Inflation jumped to 12.8 percent in March, while the unemployment rate entered double digits of 10.4 percent.

FAAC allocations shared in April by Nigeria’s three-tiers of government fell to N299bn, the lowest level in six years, due to the impact of lower oil prices and force majeure on production in February, from a previous militant strike on the Forcados terminal which exports about 200,000 barrels a day.

The International Energy Agency estimated last month that Nigeria could lose an estimated $1 billion in revenue by May, when the Forcados terminal is expected to be back on stream.

Twenty seven of Nigeria’s 36 states are technically insolvent, according to Bismarck Rewane, CEO of consulting firm ,Financial Derivatives Company (FDC).

“Shortfall in oil production is eroding benefits of higher oil prices. Government revenue is expected to remain low, pending a recovery in Nigeria’s production levels,” Rewane said.

The militant attacks on oil and gas facilities knocked out about seven gas fired power stations in the energy starved country.

Renewed hostilities in Nigeria’s oil rich Delta add to mounting problems for President Muhammadu Buhari that include the BokoHaram insurgency in the North East, nomadic Fulani Herdsmen attacks in the middle of the country and parts of the South East, Biafra agitations by some in the South East who complain of marginalisation by the government and a relentless fuel scarcity that has lowered economic activity in most of the country.

Investors have largely shunned the country as confidence fades and the economy unravels.

Nigeria’s local bonds are the only ones to have made losses this year among 31 emerging markets tracked by Bloomberg.

The Nigeria Stock Exchange (NSE) main index has lost 10.75 percent this year, the worst among regional peers.

The total value of capital imported into Nigeria in the first quarter plunged to $710.97 million, a 73.79 percent decline from the same quarter a year ago, the National Bureau of Statistics (NBS) said last week.

More than 70 percent of Nigeria’s budgeted spending will go to the salaries and pensions of public employees or recurrent expenditure.

The militant attacks may affect the budget projections as oil prices are expected to retreat in coming months.

Oil is ripe for a consolidation or correction into the mid-to-low $30s according to Dominic Schnider, head of commodities and Asia-Pacific foreign exchange at UBS’s wealth-management unit in Hong Kong.

Oil on Friday was headed for its first weekly drop in more than a month, as Brent crude fell to $45.87 a barrel.

Nigeria needs urgent policy adjustment to deal with external and domestic shocks, according to the IMF.

“There is a need to promote fiscal sustainability. Reduce external imbalances, safeguard resilience and enhance financial system efficiency. Nigeria needs to improve competitiveness through structural reforms and infrastructure investment,” the IMF said in a May 2016 report.”

PATRICK ATUANYA