Faltering crude oil prices have put the nation’s local currency, the 2018 budget implementation and the fragile economic growth on a crisis path.
Already, the near-convergence of all rates at N360/$, except the official exchange rate of the Central Bank of Nigeria (CBN), has been distorted, with each creating a wide gap, as the parallel market settles for N366/$.
Also, the CBN spot rate lost 0.02 per cent (5 kobo) to close at N306.85/$, while in the investors and exporters FX Window, the naira lost N1.06 to close the week at 365.16/$.
Yesterday, Brent Crude price sustained a renewed volatility at $58.96 per barrel, even as a ready-made market for the product remains uncertain, sending a disturbing signal to the foreign exchange market.
Nigeria’s 2018
budget, at over N9 trillion, benchmarked crude oil price at $51 per
barrel. But with reported shut-ins, leaving it at around 1.94 million
barrels per day (mbpd) against the projected 2.3 million mbpd and the
dwindling prices, projected deficits will widen.
Unfortunately, the
ensuing exchange rate differential would reintroduce imported inflation
and huge distortion on price stability, worsening the economic growth
projection currently at 1.9 per cent, which the budget earlier put at
3.5 per cent.
An analyst, Lukman Otunuga, said Nigeria is again
losing immediate gains in the temporary trade truce announced between
the two largest economies in the world – United States and China.
“The
naira has yet again struggled to benefit from such welcome market
conditions with prices hovering around N370 per dollar on the parallel
market.
It is becoming clear that the naira’s stability against the
dollar was the product of repeated interventions by the Central Bank of
Nigeria and with falling oil prices weighing on the naira’s peg against
the dollar, complicating the CBN’s effort to defend the naira on the
parallel market, further weakness seems to be on the cards.
“The
falling oil prices are poised to negatively impact government revenues
and the implementation of the 2019 budget. While the short-term outlook
for the Nigerian economy might look discouraging, confidence in the
nation will most likely receive a boost in the medium to longer term if
increased government spending ahead of the elections next year
stimulates economic growth.”
Already, Nigeria has again lost about
N425 billion in estimated budget shortfalls in the month of October due
to lower revenue from both oil and nonoil sources, an affirmation of
the oil price volatility and shallow diversification.
Of the
shortfall, faltering oil receipts at N422.13 billion in the month of
October represented a loss of N218 billion as well as 11.5 per cent
below the preceding month’s receipt of N477.06.
The Nigerian Bureau
of Statistics (NBS) said this was caused by the drop in the average
price of crude oil and declining production arising from the shutdown of
some pipelines.
The Head of Research at FSDH Merchant Bank Limited,
Ayodele Akinwunmi, said the declining oil price is not good for the
economy, especially now that the country is exposed to capital flow
reversals.
For him, the budget implementation, increased debt deals,
as a result of possible rise in fiscal deficits and the attendant
consequences on the general economy, are hugely involved.
“Crude oil
is important to the Nigerian economy as the major source of revenue for
the government and the largest supplier of foreign exchange to the
country. A significant drop in either the price of crude oil or
production will directly have a negative impact on the fiscal position
of the country.
“It will also cause major macro-economic
instability, particularly in the exchange and inflation rates. Despite
these fairly positive developments, we are aware that the crude oil
market is very volatile. Therefore, it is crucial to learn from the
events that happened in 2014 through to 2017, to take proactive measures
against an unwarranted economic crisis in Nigeria. Governments at all
levels must intensify efforts to implement policies that will grow the
non-oil sectors of the economy,” he said.
Another analyst, Egie
Akpata, said the renewed uncertainty in oil price would definitely
create more work for CBN, especially in stabilising the local currency
and maintaining interest rate at this level.
He expressed the
optimism that the apex bank is capable of containing the issue,
especially as the current leadership has till June to either leave
office or continue, despite oil price challenge.
“The only point of
expectation of new things, for me, would be if there is change in either
government or CBN leadership. Otherwise, as it stands, the focus is on
price stability and there are sufficient tools, in my assessment, to
achieve it,” he said.
Also, notwithstanding the growth recorded in
the nation’s third quarter Gross Domestic Product (GDP) as released by
the NBS, stakeholders in the real sector have described the progress as
slow, fragile and vulnerable to disruptions in the global oil market.
Though
the non-oil sector’s contribution to the GDP in the quarter under
review was higher than that of the oil sector (90.62 per cent: 9.38 per
cent), some stakeholders worry that dependence on oil revenue might
disrupt the system if oil prices drop below $50 per barrel.
Indeed, the nation’s GDP grew by 1.81 per cent (year-on-year) in real terms in the third quarter of 2018.
Compared to the third quarter of 2017, which recorded a growth of 1.17 per cent, there was an increase of 0.64 per cent points.
The
second quarter of 2018 had a growth rate of 1.50 per cent, showing a
rise of 0.31 per cent. Quarter on quarter, real GDP growth was 9.05 per
cent.
In the quarter under review, aggregate GDP stood at N33.36
trillion in nominal terms. This performance is higher when compared to
the third quarter of 2017, which recorded a GDP aggregate of N29.37
trillion, thus presenting a positive year-on-year nominal growth rate of
13.58 per cent.
This growth rate is higher, relative to growth
recorded in the third quarter of 2017 by 2.88 per cent points and higher
than the preceding quarter by 0.01 per cent points with growth rates of
10.70 per cent and 13.57 per cent.
Analysing the data, the Director
General of the Lagos Chamber of Commerce and Industry (LCCI) Muda Yusuf
said the performance remains sluggish, going by the rate of the
expansion, and that the slow growth is a reflection of lingering
challenges in the economy.
In terms of sectoral performance, he noted
that the agricultural sector is able to record improvements despite the
challenges of flooding and insecurity in the sector.
He added that
while harvest might have aided growth, there is the need to improve
productivity, as the sector is still dominated by smallholder farmers.
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