Of oil price movement and Nigeria’s economic recovery

Movement of crude oil prices in the international market, especially the significant drops recorded in the past couple of weeks, now poses a serious threat to the proposals and projections in Nigeria’s N28.78 trillion 2024 budget, and the nation’s economic recovery generally. At one point, the price of Brent crude dropped below $70 per barrel, the lowest level in almost three years, before inching up slightly.

Reuters Daily Briefing on Tuesday, September 10, 2024, showed that global oil benchmark Brent crude futures settled at their lowest level since December 2021 after OPEC revised down its demand forecast for 2024 and 2025. This was in the face of supply concerns arising from Tropical Storm Francine in the western Gulf of Mexico. Brent crude futures settled down $2.65 (or 3.68%) at $69.19 a barrel, while US West Texas Intermediate (WTI) crude settled down $2.96 (or 4.31%) to $65.75 a barrel.

These sharp declines in the prices of crude run contrary to the assumptions and benchmarks for Nigeria’s 2024 budget. While Nigeria’s 2024 Appropriation Act is based on oil price of $78 per barrel, the commodity currently sells at about $70 per barrel. Similarly, while the 2024 budget projects an oil production level of 1.78 barrels per day, Nigeria has been producing around one million barrels per day; and only inched up to barely 1.35 million barrels per day a couple of weeks ago.

While the price of crude in the international market rose to nearly $100 per barrel by September 2023, average weekly price of the commodity (especially Brent crude) has remained above $80 per barrel for the better part of 2024. Therefore, the sudden sharp drop in the prices of the commodity portends danger to the health of the Nigerian economy, especially at this time that the paucity of foreign exchange (FX) has led to massive devaluation of the naira.

The sharp drop in the prices of crude as well as the huge gap between the projected oil production level in the 2024 budget and the current actual (low) production, really put the budget in double jeopardy. On one hand the emerging scenario of constrained production and dropping prices (below budget benchmark) would lead to a burgeoning budget deficit. On the other hand, impaired FX earnings from crude oil sales would translate to weak supply of FX, and further devaluation of the local currency in the forex market.

Meanwhile, the numerous factors constraining Nigeria’s production and supply of crude oil remain even more potent: lingering oil theft phenomenon, pipelines vandalism, organised sabotage on oil assets and ‘communal disturbances’ in the Niger Delta, among others. These, in part, have led to the exit of not a few international oil companies (IOCs) from the shores of Nigeria in recent times. The upshot of all these has been a continued decline in fresh investment and production level all these years.

Evidently, Nigeria has so long stayed far below the production quota allocated to it by the Organisation of Petroleum Exporting Countries (OPEC) — losing its premier position among Africa’s oil producing countries. Indeed, from a level of over two million barrels per day quota, Nigeria has recently been cut down to a ceiling of about 1.6 million barrels per day. This was owing to Nigeria’s consistent poor output level for so many years.

The constrained production level and the sharp drop in crude oil prices will obviously lead to heightened FX scarcity in the forex market. This will in turn further drive the devaluation of the naira; and also lead to rise in imported inflation, as importers deploy so much naira to import the usual goods and services. This obviously will be reflected as a ‘cost push’ high inflationary trend, as importers of raw materials and other production inputs factor-in forex-induced costs.

Since the full floatation of the Nigerian currency mid-2023, the core problem of the forex market and, indeed, the economy, has been the gross undersupply of FX in the market. Thus, the opening of the market to the forces of demand and supply in the determination of the exchange rate of the naira, saw the local currency exchange rate against the dollar and others crash to unprecedented low levels.

Now that the main source of forex supply to the Nigerian economy (or the forex market) is threatened by the significant fall in crude oil prices, the naira might resume its freefall in the FX market. At some point early this year, the naira exchange rate against the dollar was like a yo-yo; shooting up to almost N2000/$ before coming to N1800/$. It still hovers between N1700/$ and N1650/$.

Unfortunately, these exchange rates are still two times weaker than the 2024 budget assumption of N800/$. In other words, the paucity of forex supply to the FX market has kept weakening the local currency against the dollar and other hard currencies. For quite some time now, the apex bank — the Central Bank of Nigeria (CBN) — has tried a number of initiatives to increase FX supply to the system. Particularly, the CBN had offered some extraordinarily attractive Treasury Bills that got in foreign portfolio investors (FPIs).

However, the ‘gains’ from such FPI inflows were short-lived, as the ‘hot money’ attracted left the Nigerian market no sooner than it came. Yet in pursuit of improved FX inflow, the Federal Government recently issued a dollar-denominated local bond, seeking to raise $500 million in the first tranche. Preliminary reports indicate that the bond recorded a subscription of about $900 million.

Unwittingly, however, the experimental dollar local bond issue has exposed the Nigerian economy to what the IMF calls a ‘dual monetary’ economy. This means that the ‘good currency’— the dollar — now exists side-by-side with the ‘bad currency’— the naira. And in line with Gresham’s Law, the ‘good money’ will certainly chase out the ‘bad.’ And really, now that Nigerians have official outlet to invest their assets in the durable currency — dollar — the naira will certainly stand as the loser in the long run.

With the dollar bond soon to be listed on the Nigerian Exchange (NGX) Limited and the FMDQ Exchange, it becomes tradable. This gives Nigerians the opportunity to utilise the debt instrument to save or ‘store’ their assets for durability and stability. Indeed, sooner than later, astute investors can mop up the dollar via the ‘black market’ and invest in the official dollar bond via daily trading on the NGX.

This, for sure, is one of the ills of a ‘dual monetary’ system. And apart from the dangers of the dollarisation of the Nigerian economy inherent in the dollar bond, it infringes the CBN Act 2007 (Section 15) which recognizes the naira as the only legal tender. Somehow the rabid chase for the dollar has blinded both the monetary and fiscal authorities from seeing the ugly sides of their policies and programs. We hope the economy, once again, is saved from serious negative unintended consequences of these initiatives. Time shall tell!

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