…as crude oil price heads to $20pb
…recession, job losses imminent
…salaries may be cut
…funding for critical infrastructure to be slashed
Emeka Okoroanyanwu
Nigerians may be in for tougher times as crude oil price crashes worldwide even as the dreaded coronavirus has forced a general cutback on demand.
The price of Nigeria’s sweet crude, the Brent, fell to $26.11, as at Thursday morning in the international spot market. And with global investment banking group, Goldman Sachs predicting a bottoming out at $20 per barrel in few weeks time, nearly $9 billion could be wiped out of the country’s 2020 budget of $10.59 trillion which was predicated on the country selling crude at $57pb.
It was reported that over $330 billion has already been lost from the budget in the first week of the crash, prompting the government to go for a drastic slash of $1.5 trillion from the appropriation.
In quick reaction to the low oil price which has hit adversely Nigeria’s economy, investors have rushed to pull out a staggering $2.3 billion from the capital market, further putting the economy in serious jeopardy.
According to the Nigerian National Petroleum Corporation NNPC, the low oil prices could drag on for a long time and would have collateral effect on the country’s economy.
Managing Director of the NNPC, Mele Kyari who listed the COVAD-19 pandemic and over supply as the two challenges plaguing the oil and gas industry said the two “means that there would be a lull in activities in the oil industry,” adding “if forecasts are right, we may witness very low oil prices throughout the year and that will have a collateral effect on the economy.”
To show how precarious the Nigerian situation has become, Kyari revealed last week that 50 Nigerian crude oil cargoes are yet to be sold as they await buyers as two of Nigeria’s biggest crude oil buyers, China and India are in lockdown following the outbreak of coronavirus.
Dr. Diran Fawibe, a petroleum economist and Chief Executive Officer of International Energy Services Limited in a recent interview predicted a gloomy picture of the effect of falling oil prices on the country’s economy.
He said the slump in prices will affect oil companies’ total revenue, from which the Nigerian government gets its own share in terms of taxes, royalties and others.
“We will see the impact very soon when the government will cry for revenue. As you know, we depend substantially on oil revenue, particularly foreign exchange earnings. And if foreign exchange earnings drop, this will constrain the ability of the central bank to support the prevailing exchange rate. You need buoyant foreign exchange reserves to support the currency, already there are indications that the exchange rate will go up,” he said.
“For the companies that have to import raw materials, it means that they have to look for more naira to buy dollar or other foreign currencies to do what they have been doing before. So, by the time it permeates the entire economy, you will then discover that the economy is worse off. That is why many analysts are already projecting that if this situation continues for quite some time, the Nigerian economy may go back into recession. If price of oil is averaging $30 per barrel, then it will mean that the budget will reduce by half.
A budget that was prepared on the basis of deficit, and now you are having a serious reduction, so it means that it will constrain the ability of government to execute some of the infrastructural projects and social services that had been planned,” the economist lamented.
Fawibe bemoaned that for International Oil Producing companies, IOCs, the
consequences of the cut in prices may be much. He predicted that a number of projects in the oil sector will be suspended or cancelled outright and this will have a direct debilitating effect on the oil servicing industry as most players will be forced to cut down on the number of staff. Said he, “by the time this scenario plays out, quite a number of people would have lost their jobs. Everybody will be hit. Some of the indigenous
producers are high-cost producers; it is a period of hardship for indigenous producers as well as the major producers.”
Against the backdrop of checking the rapidly spreading pandemic and keeping the economy off recession, Nigeria’s Central Bank announced a N1.1 trillion intervention fund to support critical sectors of the economy. Out of the amount, N1 trillion, said Godwin Emefiele, CBN Governor would be used to support the local manufacturing sector as well as boost import substitution.
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Other policies already put in place include, temporary and time-limited restructuring of the tenor and loan terms for businesses and households. This is expected to create stability of the lending sector as disruptions to business would make repayments difficult, thereby increasing the non-performing loans (NPLs) of the sector which had gradually started sliding towards the CBN required rate per bank of 5% or less.
The CBN has also cut down interest rates on intervention programmes from 9% to 5%. The rate cut on intervention fund, analyst at Proshare have said, would cushion the adverse consequence of business disruption that would likely result from production closures, supply chain disruptions and demand collapse as social distancing and restricted movement lead to lower domestic consumer and producer spending.
However, a N50bn targeted credit facility expected to assist in creating liquidity in the domestic credit market may prove inadequate to repel a recession as it would not address the tricky problems of supply chain disruptions, rising domestic inflation rate(reduced real consumer spending power) and the rising risk of lending into a reclining domestic economy.
Analysts are of the view that regulatory forbearance would mean that the CBN would ease enforcement of strict rules around advancing credit. The relaxed enforcement regime would allow the banks give customers breathing space to repay loans without suffering heavy charges against their profit and loss accounts by way of impairments.
In other words, the CBN would hope to keep the financial system, particularly the credit market, stable. The move is commendable but may not achieve much as the problem would still remain the lack of production throughput to create sellable goods which in turn would generate revenues, profits and free cash flows.
Some believe that the CBN policy response to the Coronavirus or COVID-19 was late. The argument was that the central bank needed to have anticipated the consequences of an economic slowdown and put a counter-recessionary monetary framework in place as early as the first known incident of the virus in February 2020.
This may be somewhat of a stretch. The problem with the COVID-19 virus response by global central banks is that they have adopted rapid monetary policy action to what remains a public health pandemic.
The challenge is not stimulating growth by way of lower interest rates and increased money supply but by taking charge of the pandemic by limiting and reversing its spread.
The slowing down of the disease is a health management problem and not
an economic problem. The use of monetary and fiscal tools can only prove effective when supply chains are settled and manufacturers start up production. The revival of production would require re-establishing forward contracts and ensuring that demand cycles are restored. The point of relevance of interest rate cuts and money supply growth would be to reduce production costs and improve demand.
In the last two-weeks central banks around the world have announced bold rate reductions but this has not inspired manufacturing output and growth as the effects of the virus has led to a shutdown of economic activities in Asia, the Americas, Europe and even Africa.
Whether the latest CBN move will help to alleviate the negative consequences of the COVID-19 pandemic and its attendant economic hardship will be seen in a few weeks time.
