How higher oil prices will impact Nigeria
The rising price of crude oil is a double-edged sword that holds mixed fortunes for the Nigerian economy.
The price rally could boost government revenue, grease the foreign exchange market, give new life to banks’ non-performing loans and encourage the restart of oil drilling, analyst say. It could also translate to higher petrol prices in import dependent Nigeria, and blunt the hunger for badly needed reforms to break decades-old dependence on oil.
Brent crude was slightly down 0.3 percent to $58.25 per barrel as at 12pm Wednesday, its highest level since 10 July 2015 ($58.73 per barrel) according to data compiled by BusinessDay and sourced from the Bloomberg terminal.
Global prices have jumped more than 20 percent since June, as a supply glut is fast easing, on the back of rising demand, deeper output cuts from the Organisation of Petroleum Exporting Countries (OPEC) and Russia and as the threat of another Middle East disruption is rekindled.
Citi Group Inc. unsettled naysayers, who question the sustainability of the rally; when its head of commodities research, Ed Morse, said “there could be a supply gap emerging,” in early 2018 as OPEC nations keep a tight lid on output, according to a Bloomberg report.
We examine, in detail, six possible impacts of higher oil prices on Africa’s largest producer.
Boost government revenue
High oil prices are sure to put a smile on the face of Nigeria, which has bled since low oil prices tipped it into its first economic recession in a quarter of a century last year, and slashed government revenue by more than half.
The economy’s exit from recession after a 0.55 percent growth in the second quarter of 2017 was propelled by a significant swing in oil fortunes, brought on by higher prices and improved production.
At a time of slowing growth, the country has outlined plans to spend its way out of recession with a N7.4 trillion budget for 2017, which carries on from 2016’s record budget in naira terms. Higher oil prices will translate to higher oil revenue, especially given that the budget benchmark oil price is $44.5 per barrel.
The government expects N4.9 trillion in oil revenue this year, and while that target has dwindled in the face of lower than planned production in the first half of the year, higher oil prices could provide a cushion for production, which averaged 1.6 million barrels per day in the first six months of 2017, according to OPEC data, 600,000 barrels below the 2.2 million projection in the budget.
Higher government revenue would go a long way in narrowing the budget deficit, which is estimated to hit 3.4 percent of GDP by year-end, according to the International Monetary Fund (IMF), from 2.8 percent last year.
It would also support public plans to invest in badly needed infrastructure from rail to power. For those breaking sweat over the country’s growing debt, improved oil revenue through higher prices could slow the pace of government borrowing.
Grease foreign exchange market through external reserve accretion
Less petrodollars meant an illiquid foreign exchange market in Nigeria, given that oil accounts for almost 90 percent of total dollar inflows into the country, so an increase in oil prices naturally should translate to a more liquid foreign exchange market and external reserve accretion.
It was no surprise that a reduction in oil revenues quickly unsettled the foreign exchange market, causing an acute dollar shortage that crimped business activity and hammered the economy. Capital controls by the Central Bank only compounded the dollar shortage, as the apex bank failed to allow the naira weaken, in line with oil prices, even as countries from Russia to Egypt, bit the bullet and were rewarded.
Higher oil prices this year have already turned up in improved dollar availability and rising external reserves. Nigeria’s external reserves had slumped to a near decade low to $25 billion in 2016.
Gross official reserves increased by US$980 million in August to US$31.8 billion. Since the recent low at end-October, there has been an accumulation of US$7.9 billion. The more telling figure is the increase of US$1.5 billion since end-March, when the CBN stepped up its foreign exchange interventions under its multiple currency practices.
When we allow for the sharp fall in imports in the recession, the buffer is now comfortable. However, the figures provided by the CBN are gross and mask the swap transactions it has entered into with banks. The pick-up in oil production has been an obvious positive for accumulation.
Give new life to banks’ NPLs
Bad loans in Nigeria’s banking system have soared to a five-year high and are more than double the limit set by the regulator, as the industry struggles with an economic downturn.
The ratio of non-performing loans to total credit rose to 14 percent at the end of 2016 from 5.3 percent at the end of 2015, according to the Abuja-based Central Bank of Nigeria, which requires banks to keep the measure below 5 percent.
Nigerian lenders are battling severe shortages of foreign exchange, which an almost 40 percent devaluation of the naira against the dollar in June has failed to rectify.
Higher oil prices is certainly good news for the banks in this regard.
“Greater inflows of oil receipts, on the back of both higher prices and greater production, will lead to greater liquidity in the economy and see increased activity in the banking sector,” London-based BMI research said in a September 7 note to clients.
Not only will higher oil prices and its attendant effect on dollar liquidity help the bank’s cash positions, it should also allow more companies, particularly oil and gas firms, service their pile of dollar debt.
Encourage oil-drilling restart
A higher oil price means higher profit margins and in some instances, that has also meant more investments in oil drilling. At a record low of $28 in January 2016, oil prices offered little or no incentive for fresh drilling, as production costs meant profitability was constrained.
Despite that, a lot will rely on the sustainability of the oil rally in encouraging fresh drilling.
Global credit rating agency, Moody’s, expects oil price in 2017 to hover between US$40 per barrel and US$60 per barrel, while Lagos-based investment bank, FBN Quest projects an average of US$57 per barrel
Higher retail price for petrol
The flip side of a more expensive barrel of crude oil is that it makes fuel imports more expensive for Nigerian oil marketers.
The current N145 per litre petrol price template is predicated on an exchange rate of N285 per US$ and oil price of US$45 per barrel, and these have been long overtaken by an exchange rate of N305 per US$ (or $360 at investors and exporters window) and oil price of $58 per barrel.
Higher oil prices will only stoke further concerns over the sustainability of the oil subsidy by the government, which it has maintained to taper agitations among the people who are already hard pressed by accelerating inflation, which despite six successive months of decline, remains at a near 11-year high.
State-owned Nigerian National Petroleum Corporation (NNPC) sells to petrol marketers at NGN133 per litre, thereby providing a subsidy of NGN12 per litre. The un-dynamic price template has seen the NNPC take on a higher responsibility in the past six months.
Nigeria consumes 33 million litres of gasoline a day, or roughly 280,000 barrels, which would require the market to provide some $18 million a day.
Importers cover about 30 percent of this, with the state oil firm, the NNPC covering the rest, which is mounting pressure on the market for dollars. Thirty percent of foreign exchange demand in Nigeria is used for fuel imports, according to data from the Central Bank.
However, it is forced to rely on imports to meet 70 percent of its domestic refined petroleum products demand, as the NNPC’s four refineries produce at less than 20 percent of installed capacity of 450,000 barrels per day.
Blunt hunger for much needed economic reforms?
Higher oil prices could cause government officials to walk away from the much-needed reforms to diversify the country’s revenue base away from oil. That has a little chance of happening, however, analysts say.
“We have learnt some hard lessons that would make it difficult for the government to slumber,” said Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI).
“We are past the era of US$100 per barrel and government is conscious of the fact that even at US$58 per barrel today, the price is still half the level it was when we could afford to remain dependent on oil,” Yusuf said.
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