Nigeria dependence on oil revenue underlined by coronavirus
The fast spreading coronavirus from China is threatening Nigeria’s primary source of revenue, oil.
Demand for oil has slumped in the months since the outbreak of the epidemic.
“Nigeria is still hopelessly dependent on crude oil and so anything the impacts the price or demand for crude oil impacts us. And because we have no fiscal buffers or significant foreign reserves the impacts will be significant,” Dr Nonso Obikili, Director at Turgot Centre for Economics and Policy Research said.
Global oil prices fell by as much as 15%, falling to a three-month low since the outbreak, putting pressure on Africa’s largest oil producer’s plan to raise N2.64 trillion in revenue from oil sales from output of two million barrels a day.
The benchmark price assumed in the national budget is $57 per barrel.
Brent Crude crude rallied to $54.80 on 6 February, from a low of $47 on Monday as impact of the coronavirus hit oil demand, according to data from Citigroup.
- Citi projects Q2 Brent Crude prices at $50, down from a previous forecast of $68 per barrel; and expects Q3 Brent Crude prices to reach $53, down from $63 per barrel. It also revised the Q4 forecast to $58, up from $57 per barrel.
“In this instance if the oil prices drop further or if it remains in the 50s for a significant period of time then we could begin to see even more pressure on the already pressured exchange rate and even more pressure on the already struggling fiscal space,” Obikili said.
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While it remains uncertain how much in demand cuts the viral infection will trigger worldwide, the Organization of the Petroleum Exporting Countries (OPEC) estimates that the impact could reach at least 400,000 barrels per day in demand cuts.
- This could likely trigger the oil prices to fall below $50, according to energy analysts.
The epidemic has forced OPEC into an emergency meeting in which analysts expect that the the cartel will recommend further cuts to oil output in an effort to curb glut amid a slowing global economy as well as soaring production in the United States. Saudi Arabia is reportedly looking for cuts as much as one million barrels per day, which will affect Nigeria, however the pendulum swings.
Last year, Nigeria, which has previously been exempted from output cut agreed to a 57,000 barrels per day, and said it will abide by OPEC’s decision to cut output should it be further needed.
- If OPEC recommends a cut, the “ impacts will be similar to a drop in oil prices, but perhaps not as severe depending on the cuts we have to make,” according to Obiliki.
- It is being reported that OPEC will likely make a decision to cut output by a further 500,000 barrels per day (bpd) until July at an emergency meeting in response to the coronavirus.
- Last year, the group agreed to cut 1.7 million bpd until its next meeting in March 2020, but has now had to reschedule its March 5-6 meeting for February.
If a significant part of Nigeria’s income is slashed, this could potentially prompt Nigeria to borrow more than anticipated to fund the 2o20 budget, Ayodele Oni, an energy analyst at Bloomfield Law Firm said.
- The country is expected to borrow as much as N1.549 trillion from domestic and international markets to fund its 2020 budget, according to its Debt Management Office (DMO).
- Nigeria’s growing debt has remained a concern as the debt profile grew to N26.215 trillion in 2019 from N25.701 trillion in 2018, a 16.88 percent growth in a 12-month period, per data from the debt management office.
There seems to be little or no short-term alternatives for a country of two hundred million people who depend on revenue from oil sales as the world faces likely dwindle in oil revenues triggered a relentless viral outbreak that has infected 28,000 Chinese citizens and killed more than 560 people.
Bottom Line: “Medium to long term the goal is to diversify our export basket away from crude oil. It is a very specific objective which so far we have made little progress at,” Obikili said.