Policy Agencies Did Nothing to Insulate Nigeria from Oil Price Slump

Ayo Teriba


With over 60 percent regression in the price of crude oil per barrel between January and March, the Nigerian economy has started experiencing major shocks similar to what it went through between 2016 and 2017. Consequently, this has triggered apprehension in the ranks of the decision-makers and policy analysts that Nigeria may enter into another era of a meltdown, thereby forcing the federal government to cut 14.28 percent from its 2020 budget valued N10.59 trillion. Amid this apprehension compounded by the outbreak of COVID-19, the Chief Executive Officer, Economic Associates (EA) and one of Nigeria’s leading economists, Dr. Ayo Teriba, in this interview with Gboyega Akinsanmi, argued that the current oil price slump was just a temporary challenge. Excerpts:

With the oil price slump, will Nigeria not enter another recession?

We should not take the decline in oil prices out of context. We should always mention what led to a decline in the oil price. Oil prices collapsed because of COVID-19, which led to temporary lockdowns in China and other Asian economies. China accounts for about 25 percent of the world’s demand for oil.

The lockdown meant that China’s demand was temporarily no longer in the market, creating a temporary supply glut that brought down oil prices.

Not just China’s demand, reduction of traffic inside, inward and outside of China to prevent the spread of the pandemic also temporarily depressed demand for oil further, as flights couldn’t go into and out of China, meaning the demand for oil by countries where those flights come from, were also temporarily reduced.

That is where the collapse of oil prices began. It resulted from a pandemic that will be short-lived as China will not lockdown forever.

The lockdown started in January, and already, they have started lifting it. It is just a bit unfortunate that as China is ending its lockdown, Europe, America and Africa are just entering theirs.

It has taken China three months to bring the pandemic under control. Let us see how long it will take other countries. Perhaps, it will also take them three months to contain COVID-19. However, lessons from China’s experience should mean a shorter duration.

Does this suggest that the present oil price slump cannot trigger economic meltdown?

We are discussing a temporary problem that led to the collapse of oil prices. It is now a question of how soon the world can bring the pandemic under control. The reason the pandemic led to lockdown is that there are no vaccines. If there had been vaccines, everybody would simply have been vaccinated and continue with their lives. But in the situation where there are no vaccines or any confirmed remedy, and treatment must be based on trial and error, the only way to contain it is to prevent the spread. That brought about the lockdown.

If a vaccine is produced today, or a drug that can treat COVID-19 emerges today, there will be no further need for any lockdown. There was a time that malaria was a death sentence for those coming from outside Africa. But now when they come to Africa, they just take an anti-malaria drug to prevent it. It did not stop traffic. The reason COVID-19 is stopping traffic is that there is no effective medical remedy yet to prevent the spread.

Therefore, we must resort to the restriction of movement and social distancing, which will be temporary. When the pandemic is eventually under control, the oil price is likely to rebound because of the rebound of China and other countries demand oil. We are talking about a temporary problem. There is no reason a decline in oil prices for one month should lead to a conversation about a recession.

Nothing has come up today that suggests the oil slump will continue for years or decades or that the lockdown will persist. That is why Russia and a few other countries can afford not to cooperate with the Organisation of Petroleum Exporting Countries (OPEC) to cut global oil production further. Russia is known to have boasted that its economy and budget can withstand six to ten years of $20 to $30 a barrel oil price. If Nigeria also can withstand the problem for three or six months, we could have coped easily.

If the oil price decline is not enough to cause a recession, what informed the apprehension that Nigeria might enter another era of recession?

It is just a one-month oil price weakness. We are talking about recession. We are also talking about reviewing the budget downward, simply because we failed to prepare for contingencies. We had a similar problem in 2016. As a result of the temporary weakness in oil prices at the time, we suffered a steep permanent devaluation of the Naira and a permanent-growth reversal that ended in recession and economic stagnation. Oil prices weakened temporarily, and our economy fell apart permanently because there was nothing to insulate our economy from the weak oil price. Between 2016 and now, we have just shown the world that we learnt nothing. Policy agencies did nothing to prevent a situation in which a temporary decline in oil prices would once again create permanent economic problems.

The oil price has fallen for just one month. Within one week or two, we are talking about recession. We are talking about the recession because we failed to keep adequate levels of foreign reserves. Our external reserve adequacy is very poor. Adequate levels of foreign reserves would have guaranteed that we can meet all foreign trade and capital flow obligations in the foreseeable future and have something left to cushion unforeseen temporary shocks like this COVID-19 pandemic. We often claim to have reserves that can cover our imports for three to six months, but it is no more about imports alone in the prevailing realities of globalization where net financial flows are larger than net trade flows. Of course, we can see that this situation has been with us since 2016 when the Central Bank brought out the list of 43 items that were excluded from the official foreign exchange market. But still, we do not have external reserve adequacy. In 2016, Egypt was in the same boat as us.

They are no longer in that boat. Between 2016 and now, Egypt has built its external reserves to higher thresholds required to underpin a stable exchange rate. They got about $12-billion loan from International Monetary Fund (IMF), they even issued foreign currency bonds of about $7 or $9 billion, they now attract more remittances than we do, and they attract more foreign direct investment than we do. So, Egypt’s external reserve adequacy today is better than ours. However, in 2016, we were both inadequate in terms of foreign reserves. So, we are not solving the problem that we had in 2016. But we are about to repeat it. We failed to make hay while the sun shone.

How will this lockdown redefine the future of Nigeria’s economy?

Fortunately, the spread of the lockdown to other parts of the world including Nigeria offers us some relief: just as the onset of the lockdown in China weakened oil price, reducing our capacity to supply foreign exchange, the spread of the lockdown cuts demand for forex. The Central Bank of Nigeria can do away with its list of 43 items now that people cannot travel because airports are closed and other countries that we could have imported from are also locked down. Nobody needs foreign exchange during this lockdown anyway. We are getting to the stage that people cannot even leave their homes. Banks should soon be closed. Markets would close. That is a complete break. Half-time, as they call it in football.

When oil price slumped in March, we began to run helter-skelter about the budget and about whether we were going to have a recession. But we have half time now. The lockdown is an unexpected half-time. We should get out of the panic mode. The game has stopped for now. We should now reflect, prepare and plan how to rejig our strategies and tactics before coming back into the pitch for the second half when the lockdown ends. Though our forex supply is weak, the lockdown has weakened forex demand as well.

What are the options before us as a country to respond to what you described as the second-half challenge?

Nigeria must prepare a strategy to take up whatever opportunities emerge immediately the lockdown ends. On the negative side, the global lockdown has cut export and growth opportunities. It is not just that the price of oil is weak. We can’t even get enough buyers to take up what we produce because other countries are similarly locked down. Exports have been brought to a halt, though temporarily. Growth has been slowed down, though temporarily. However, the positive side is that the developed countries are injecting trillions of dollars into a global financial system that is already awash with liquidity. In some developed countries, interest rates have been negative in the past decade to reflect how cheap liquidity has become.

Their response to this lockdown is that they are pumping more money into a global financial system that is already in a liquidity glut. They are giving people money at a time that they cannot even spend it, at least until the lockdown ends. When the lockdown ends, there will be surplus liquidity in the international financial system. Much of the liquidity will end up in developing countries that know how to adopt investment-friendly policies. So, never mind what goal we did not score or what goals we conceded in the first half. This is half-time. When the second half resumes, we have fresh opportunities to do some of the things we had missed the opportunities to do between 2016 and now.

In 2016, there was no lockdown. There was no half-time. There was no super liquidity injection because of developed countries trying to protect their people. But now we have that opportunity. A lot depends on what Nigeria can make of that opportunity. We may not be able to grow exports by much, but there will be a lot of liquidity in the global financial system in search of investment destinations. The issue for Nigeria now is that our fate will now depend on how much of that liquidity we can attract to address the consequences of weak oil prices and exports.

How do we attract liquidity into the country – through credit facility or foreign direct investments (FDIs)?

We should not be talking about loans at this time. All the countries that we can look up to for credit facilities have problems of their own. They are all in lockdown. They are dealing with the pandemic. What they are occupied with now is how to cushion the adverse effect on their people. China cannot tell Nigeria that it is going to lend us 18 billion when it has its own challenges at home. India also cannot. India is in lockdown for 21 days. Is it the US? Is it the UK? Is it France? Is it Italy? Is it Germany? Or Japan? We cannot tell other countries to leave their problems and lend us money. It is not about borrowing from any country. But some of the monies these countries are injecting into their economies will get into the hands of our Diaspora. They cannot even spend the money now. So, they will be looking for where to save it.

If we get our acts right, we can issue foreign currency bonds that appeal to them. Alternatively, we can open those sectors where we have historically shut out foreign investors, especially where the government has 100 percent equity.

Among others, these sectors include power transmission, rail, and pipelines. These are sectors that are likely to attract very large inflows of foreign investment. Saudi Arabia is offering investors equity ownership opportunities across its infrastructure sectors. India is now getting over 60 billion per year from foreign direct investments by allowing investments into sectors from which foreign investors were historically prohibited. I am talking about two types of investment: remittances and FDI.

For Nigeria, attracting large inflows of FDI is as simple as the government accepting to reduce its ownership. If the government is prepared to dilute its ownership in all infrastructure entities from 100 percent to 49 percent, we will find foreign investors as we found for the Nigeria Liquefied Natural Gas (NLNG), GSM telephony. If we consider this option, we get the money and pension sector. Because the government has 100 percent ownership in some sectors, it declares a monopoly over the sectors. Nobody else can come in. It is either we sell part of government shares or liberalize the space or do both to open the gate for FDI inflows.

Let other business interests come in to compete like we did when NITEL got a free GSM licence and when new entrants bought theirs. NITEL’s 0804 is dead. In terms of foreign direct investments, there are two types: government can sell part of the equity it owns to attract brownfield FDI or liberalize the space to attract Greenfield FDI as we have done in GSM telephony, in the pension sector or in the NLNG. Second, apart from foreign direct investments, I am talking about remittances from the Diaspora.

We need to prepare ourselves and get as many inflows as we can through all these channels. I am not talking of portfolio inflows or donor funds or foreign aid that tend to be either too erratic, as in the case of portfolio inflows, or too little to be of much use, as in the case of donor money. Combined inflows available to developing counties through foreign direct investments and remittances were already in excess of one trillion US dollars by 2018. COVID-19 induced liquidity injections might push that figure to N1.5 trillion or N2 trillion by the end of 2020. We just need to work out plans for Nigeria to get a good share of these inflows, even while exports are likely to remain weak.

Can the issuance of foreign currency bonds also help in any way?

The primary threat to our economy is what I referred to foreign reserve inadequacy at the start of this conversation. If you have adequate levels of external reserves, your currency will be stable, and money will stay in your financial system. If money stays in your financial system, it will boost your economic growth. If you do not have adequate levels of foreign reserves, your currency will be weakened. Apparently, the weak currency will drive money out of your financial system because holding foreign exchange or real estate will preserve wealth better than putting the money in the bank deposits, bonds, or stocks. As weak exchange drives money out of your financial system, growth will halt because people cannot secure monies to fund growth opportunities. So, it is a four-stage thing. Where it starts is reserve adequacy.

Reserve adequacy strengthens your currency. Strong currency encourages people to prefer money in the bank deposits, bonds, or equity to foreign exchange or real estate, as we saw in Nigeria between 2005 and 2008. If money stays in the bank deposits, bonds or equity, it will fuel growth. Now, the key problem to solve is the weak external reserves position. And the only way to address the weak external reserves position is to look for alternative types of foreign exchange inflows apart from exports.

Instead of issuing a bond in naira, we can issue in foreign currency. Egypt issued foreign currency bonds and they got between $7 billion and $9 billion.

Nigeria may get as much as $20 billion to $30 billion if we chose to issue foreign currency bonds, especially by appealing our diaspora and use the proceeds to shore up foreign reserves. Nigeria’s capacity to issue such foreign currency bonds, I believe, is better than that of Egypt, particularly given our equity stakes in numerous dollars-denominated wholly-owned entities like the petroleum pipeline company and numerous dollars-denominated joint ventures. We can partially privatise the wholly-owned entities and issue foreign currency bonds based on our remaining equity stakes in the joint ventures.