President Buhari faces the third recession of his career as oil prices plunge and the rising debt profile worries Nigerians.
A crash in global oil prices would push Nigeria towards a second recession in four years since the former head of state Muhammadu Buhari resumed office as the country’s president in 2015, analysts say.
In the immediate term, they project a fall in oil prices will quicken depreciation of the Nigerian currency amid rising external debt.
Brent crude fell to $30 at the weekend before it rallied this week, presenting an opportunity for the Central Bank of Nigeria (CBN) to cease defending the naira and allow more income for the government.
Dr Nonso Obiliki, Director at Turgot Centre for Economics and Policy Research, told the Africa Report: “it is now a case of when not if. Of course, the currency has been overvalued for some time now and based on the trajectory was set for a difficult year anyway.”
He concluded: “the reserves have been falling since the start of the year, so a devaluation was already on the cards, even before the oil price crash. The crash just brings the date closer.”
The oil price plunge “will leave the CBN in an untenable position with regards to its naira defence policy,” said Ikemesit Effiong, Head of Research at SBM Intelligence.
He added: “the breaking point for the government’s naira defence policy was last year and it has been plugging the hole in official spending with an aggressive debt programme.”
“Governor Godwin Emefiele has said in the past that he would only consider a devaluation if foreign reserves fall below $30 billion. We think that the CBN will be compelled by the price war to devalue the naira in order to maintain a semblance of stability in the country’s foreign reserves. This will be accompanied by an interest rate cut to manage the pressure that is sure to ensue on the real sector and consumers.”
Oil plunge will hurt Nigeria
The West African nation and the continent’s largest oil producer said last week it was considering adjusting its 2020 budget as the fast-spreading deadly Coronavirus plunged crude price below Nigeria’s target in this year’s budget.
“The current crude oil price of $53 a barrel is below the budget benchmark. So, what we are doing is studying the situation. We are committed to doing a midterm review,” said Finance Minister Zainab Ahmed, speaking in the nation’s capital.
The latest oil plunge will hurt the Nigerian naira according to analysts at Aza, Africa’s largest non-bank currency broker by trading volume.
According to analysts: “given Nigeria’s heavy reliance on oil as the major contributor to GDP, the reduction in oil demand is severely limiting the supply of dollars to the economy, resulting in illiquidity in the market and buying pressure on those dollars available.”
They added: “as the Coronavirus continues to damage the global economy, we expect to see further weakening pressure on the naira in the coming days, and advise reduced exposure.”
If oil prices continue to fall sharply, it will put “significant pressures on already limited government expenditure – reflected by the fact that around 50% of public revenue is currently spent on debt repayments,” according to analysts at Aza.
“Recession is just a word”
As oil prices plunged to $30 per barrel at the weekend, analysts predicted Nigeria could be heading towards another recession.
According to Effiong: “in this depressed economic climate, for the reasons enumerated above, a recession is almost inevitable. For insolvent states unable to finance their significant recurrent expenditure commitments, another round of bailouts from the shrinking federal purse will be provided, just like in 2016.”
He further explained: “this impending fiscal crisis risks being transmuted into a monetary crisis as government simultaneously tries to keep its constituencies happy while propping up the currency.”
A recession will see a reduction in the purchasing power and living standards of Nigerians. “To put it simply, the combination of increased taxes and charges and a freeze in public sector pay and private wages has left Nigerians with little financial wiggle room. In cities like Lagos, increased commuting costs as a result of a ban on commercial motorcycle taxis and rickshaws have compounded a dire financial picture for most low and middle-income Nigerians. In an ideal economic setting, a recession is best fought through a rise in consumer spending. In Nigeria’s case, it is impossible to see that happening as none of the government’s policies — including the border closure and slamming a lid on imports — remotely addresses the burning question of stimulating consumption,” he continued.
Country’s high debt profile problematic?
Nigeria’s rising debt also presents a problem, analysts say.
The country’s debt profile rose by $22.7 billion (19.97bn euro) after the Senate granted Buhari’s foreign loan request. The loan would help Nigeria provide key infrastructure including agriculture, health, education, water supply as well as provide social safety net programmes, according to the president.
While the granted loan approval divided the country along political lines, analysts see additional problems.
“The problem with this oil price crash is that the government’s debt programme is contingent on repayments backed by oil sales, which are sure to plummet because of the excess crude flooding of the global oil market. Consequently, while the country’s debt profile will rise in the short term, it will increasingly become unsustainable,” said Effiong.
He continued: “we are looking at a risk of future Nigerian administrations inheriting a high debt, low growth economic profile.”
What comes with naira devaluation?
A devaluation could trigger higher fuel and electricity prices, higher import prices, including for food, and more outward migration as foreign salaries look even more attractive, according to Obiliki, but “on the plus side, a devaluation will mean more revenue for the government as oil exports are priced in dollars.”
The devaluation effect may be “somewhat positive” for the nation as the CBN will focus on a managed depreciation than a large, one-off devaluation like it has done in the past, according to the Nigerian analysts.
The article continues below
Get your free PDF: The 100 most influential Africans, 2019 edition
Trailblazers, leaders and titans
Complete the form for your free download of The Africa Report’s 2019 list of the 100 most influential Africans. Get your free PDF by completing the following form.
In the short to medium term, however, Obiliki believes that “most Nigerian will see a further worsening of their economic conditions as purchasing power diminishes and sectors from FMCG to telecoms begin to denominate their products and services in smaller quantities in order to keep up with shrinking consumption.”
Understand Africa's tomorrow... today
We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.View subscription options