By Obinna Chima
There appears to be a glimmer of hope for Nigeria with the evidence that oil prices are stabilising and could even begin to rise again.
According to the International Energy Agency (IEA), lower oil output in the US and other countries was helping to curb the glut in the supply of crude oil.
Oil prices had depreciated 70 per cent since June 2014, even as it slumped to as low as $27 per barrel earlier this year. But while the benchmark Brent crude closed at $40.79 per barrel on Friday, the US West Texas Intermediate oil closed at $38.77 per barrel.
The Paris-based International Energy Agency said supply outages in Iraq, Nigeria and the United Arab Emirates reduced output from the Organisation of the Petroleum Exporting Countries by 90,000 barrels a day, and production declined elsewhere around the world. These moves, as well as major producers discussing a coordinated output freeze, may signal what the agency termed in its monthly report a “light at the end of what has been a long, dark tunnel” for the global glut of crude that has overwhelmed oil markets.
The market also was boosted by a research note from Goldman Sachs Group, which has had one of the more bearish outlooks since the market collapse took hold, suggesting the “green shoots” of a rebalancing between supply and demand appeared to be in the works, and that it had increasing confidence supplies would decline this year as long as prices remain low.
Nigeria has been grappling with the challenge of a significant drop in its revenue as a result of the slump in crude oil prices, with monthly allocation being shared among the three tiers of government reduced majorly. This has seen a lot of states not being able to meet their obligation. The situation also led to a substantial reduction in its forex inflow, which has created scarcity in dollar allocation, due to the demand management system adopted by the Central Bank of Nigeria (CBN). The CBN also imposed some forex curbs in its bid to conserve the country’s external reserves. This has also led to loss of confidence in the economy as businesses lament the capital flight in the system.
However, revealing that there is still a ray of hope for continuous upswing in crude prices, the Minister of State for Petroleum, Dr. Ibe Kachikwu said recently that as part of measures to stabilise crude oil prices, some members of the OPEC were scheduled to meet with swing producer, Russia on March 20 in Moscow to fine tune collaborative strategies. Kachikwu said the organisation would target a new oil price equilibrium of $50 a barrel.
But the President of Dangote Group, Alhaji Aliko Dangote, recently advised Nigerians to stop viewing the low oil price environment as a setback, saying that the situation offers the nation an opportunity to diversify its revenue base. According to Dangote, the situation should galvanise the country into broadening its revenue base through diversification of the economy.
He however noted that some sectors in the country were facing serious challenges as a result of scarcity of foreign exchange.
“If your business model is to import 100 per cent, definitely you would be facing challenges because the inflow of foreign exchange is not where it used to be a year and a half ago. Then we used to get about $3.2 billion on a monthly basis, but today we are generating just about $1 billion.
“This is the right moment to pursue the diversification of the economy which we have been talking about. I know that once oil gets back to $80 per barrel, we would relax and go back to the same improper behaviour. But I think this is the right time to change that attitude for good.
“Government must come up with the right policies because if we don’t do it now, we may not do it ever. But low prices do not mean doom. In 1998 – 1999, the price of oil was $9, so what we need to do is just to block the leakages and pursue diversification,” he added.
He urged Nigerian businesses to take advantage of the opportunities in the West African sub-region, saying that a population of 320 million in the sub-region is a big market.
“Our projects are mainly focused on import substitution. We are working to be self-sufficient. What we need is consistency in terms of policies. By 2020, our population would be over 200 million people and it doesn’t make sense to continue to go to the central bank to collect forex to import goods for over 200 million people. We need to work towards being self-sufficient.
“Now, in the next five years, we would grow one million tonnes of rice. Do we have the market? Of course there is a market locally. Nigeria imports rice officially and unofficially of almost 2.8 million tonnes. Majority of it comes from the borders,” he said.
In his contribution, the Group Managing Director, Access Bank Plc, Mr. Herbert Wigwe, pointed out that there are several manufacturers that rely on forex for their raw materials and are now going through tough times due to the shortage of dollars.
“However, are there opportunities? I believe there are. I think it is time for us to move towards import substitution. But I think we need to do things to support the supply side of forex and liberalise the market. Even for those who have to source their raw materials locally, there is a value-chain effect.
“If the entire value-chain in a production process is not sorted out, we would have a problem. So access to foreign currency for raw materials is important. However, it is important that people start looking at how to use local raw materials to produce,” Wigwe said.
The Access Bank boss, who stressed that forex scarcity was creating significant bottlenecks in production processes of firms, however ruled out a banking crisis. According to Wigwe, Nigerian banks are healthy.
Also, the chief executive of Oando Plc, Mr. Wale Tinubu, stated that as a result of the slump in crude prices, there has been a lot of restructuring in the oil and gas industry.
He also pointed out that investors were concerned about the country’s exchange rate policy and the future of the naira.
Also, analysts have stressed the need for monetary policy measures in the country to always complement fiscal policies in order to stimulate growth in Nigeria.
A report by the Financial Derivatives Company Limited, noted that whereas Nigeria cannot influence the direction of oil prices in anyway, the government can influence the severity of the impact of lower oil prices on the economy. It pointed out that several countries had to adopt flexible exchange rate system to dampen the impact of oil price shocks, saying that Nigeria needs to adopt an exchange rate policy that is in consonance with current market dynamics.
In its opinion, there are two options available to the government: to either do nothing and allow economic gangrene to set in, or adopt a deficit budget plan that must be implemented immediately.
It pointed out that the 2016 appropriation bill was based on the premise of a deficit funding.
“While this is a smart move, timing is of essence. The fracas over the budget numbers has stalled the passage of the fiscal plan which will spill over to the implementation of key projects that are expected to stimulate economic recovery.
“While Nigeria is being affected by the current oil price level, and will likely experience some further economic challenges in the short term, the country now has the opportunity to create a stronger position against this oil price shock and those to come in the future,” it added.