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External reserves may drop by $4.44 bn

By on October 14, 2014

Economists are of the view that Nigeria’s foreign reserves will be seriously depleted in the coming months if the fall in global crude oil prices continues, thus posing a threat to the economy, OKECHUKWU NNODIM writes

The 22 per cent decrease in the prices of crude oil in the last four months may lead to the depletion of Nigeria’s external reserves by $4.44bn and may inevitably warrant a slash in the revenues accruing to the three tiers of government, economists have said.

Crude oil has averaged $88 per barrel in the international market since the beginning of this month.

According to analysts, the price decrease poses a threat to Nigeria’s economy as the sale of crude is the country’s biggest source of revenue.

Professors of Economics told out correspondent that if not reversed, the situation would lead to liquidity squeeze in Nigeria, a development that would make the citizens scale down on their expenditures.

Similarly, analysts at Financial Derivatives Company, a firm renowned for global economic analysis, stated that the fall in oil prices might lead to “a definite slash in federal and state revenues.”

The Chief Executive Officer, FDC, Mr. Bismark Rewane, stated in the firm’s report for the month of October that the unexpected 22 per cent fall of Bonny Light crude from $116 per barrel in June to $88 per barrel in October had once again reminded Nigerians about its economic vulnerability to exogenous shocks.

He said, “Oil price, the single most important determinant of Nigerian macro-economic stability, has declined by over 22.5 per cent in the last quarter to $88 per barrel. The potential impact of this sharp drop is a likely erosion of external reserves and a definite slash in federal and state revenues.

“The analysis of the vulnerability of the economy to this exogenous shock shows a sustained fall in the price to $85 per barrel could lead to an external reserves depletion of approximately $4.44bn.”

The country’s external reserves had maintained a balance of $39bn for a while, but declined marginally between August and October. It fell by about $15m, down from $39.62bn recorded on August 26 this year, to $39.47bn, which was the latest figure as recorded on October 2, 2014.

The price of Nigeria’s Bonny Light crude oil as of September 24, according to information from the Central Bank of the Nigeria, was $95.2 per barrel.

The decline in oil prices is coming at a time when the Nigerian oil and gas industry is encumbered with several challenges, including crude theft, pipeline vandalism and the non-passage of the Petroleum Industry Bill that seeks to overhaul the industry.

Rewane noted that the drop in oil prices was the reason why the next meeting of the Organisation of Petroleum Exporting Countries in November would be one of the most important for both the very rich and less wealthy oil producers.

“At their next scheduled meeting on November 27, the OPEC will seek to address growing concerns bordering on stability in the oil market,” he said.

The $88 is the lowest price level in over two years and the drop has been largely attributed to a global demand growth slowing to its weakest level in three years and buoyant non-OPEC supply led by the United States’ shale boom.

The shale boom has been in its highest level in three decades.

OPEC’s monthly report for September indicated an expected fall in demand by 800,000 barrels per day, bringing production down to 28.2mbpd from 30mbpd. The International Energy Agency, earlier this month also forecasted a fall in OPEC production to 29.6mbpd in 2015.

Economists noted that as OPEC struggled to cope with falling prices, a production cut in response to the current conditions and the outlook for the oil market might not exactly be on the cards just yet, but the prospect of lower production from the cartel had brought to the fore more delicate questions.

Rewane noted that some of the vital questions might include, “How is a production cut, if agreed, going to be distributed? Who would agree to a cut? And perhaps more importantly, who is unlikely to agree?”

Analysts at FDC noted that earlier fears that events in Iraq and Libya would severely impact OPEC’s output, cutting global supply and lead to a price rise, had proved to be overstated.

They explained that oil prices were not alone in this plunge, adding, “They have followed the general trend of other global commodity prices like metals and agricultural products, which had dropped to their lowest levels since the global financial crisis following concerns over slowing growth in China, growing supply in key markets and a strengthening dollar.”

A professor of Economics from the Department of Finance, University of Lagos, Prof. Esther Adegbite, told our correspondent that government agencies should brace for future liquidity squeeze owing to the drop in oil prices.

She said, “Since there is a drop in oil prices, this will lead to a drop in government’s revenue. And if there is a drop in government’s revenue, there is going to be a squeeze and tight monetary and fiscal policies. The monetary and fiscal policies will be tightened; and so, there will be need for adjustments in government expenditures.

“This, of course, will be a downward adjustment, and if government is trying to reduce its expenditures, it will likely affect every facet of the economy. And all of us will have to scale down as a result of the general tightening in the economy.”

Also speaking on the issue, the Chief Executive Officer, Economics Associates, Dr. Ayo Teriba, noted that Nigeria was not feeling the impact of the decline in oil prices yet because the dollar had been strengthened and the commodity’s prices might pick up soon.

He said, “The oil price per barrel is in the US dollar and the dollar has recently been strengthened, for example, against the pounds sterling and the euro. So, if the dollar strengthens, the dollar price of crude will fall.

“Three months ago, we were talking $115, and today, we are talking $95; but the average for this year may be around $100 per barrel. There is possibility for the price to go up anytime soon.”

 

 

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