Experts say falling global oil prices may cause relapse in the economy

If the nation’s production remains at current level, there would be pressure on the budget and future economic growth, experts say.

Despite the present claimed resilience of Nigeria’s economy, the falling global oil prices may result in a possible relapse of the economy, if the nation does not embark on activities that will ensure economic stability in the long run, finance experts have said.

Available data reveals that since March 2013, global oil prices began to fall noticeably to an average of $111.67pb (Bonny light), which was five per cent lower than the previous month’s average of $117.67pb. OPEC, the global oil cartel, attributed this fall to renewed euro-zone fears as well as a reduction in refinery demand caused by substantial maintenance worldwide.

Bismarck Rewane, a finance analyst and Managing Director, Financial Derivatives Company, a diversified financial institution, said the development is increasing warnings from analysts.

“Since March, oil prices have continued to fall every month. As Nigeria is dependent on oil for about 80 per cent of its revenues, the development has intensified warnings from analysts about a possible relapse in the economy”.

He said the Nigerian economy, has shown remarkable resilience as certain economic indicators linked to oil prices have remained relatively stable over the period under review.

“Nigeria’s external reserves, for example, have maintained a robust position of $48bn covering about 11 months of imports. Moreover, the naira has remained relatively stable, fluctuating within the 3% band set by the CBN; the debt-to-GDP ratio is currently 21%, which is below the 40% threshold. Obviously, the economy would not have remained stable with declining oil prices if all other factors would have remained constant,” he said.

Factors sustaining the economy

A number of factors have so far helped hold-up stability in the Nigerian economy. These include the Central bank’s sustenance of a contractionary monetary policy, which experts say has helped suppress inflationary pressures in the economy, (The inflation rate has been in the single-digit zone since the start of 2013, and currently stands at 9%).

Also, the Monetary Policy Committee (MPC) has left the benchmark interest rate unchanged at 12 per cent since October 2011. Compared to advanced economies, experts say this has resulted in a substantial inflow of foreign investment, due to the high interest rate. The lower inflation rate and increased investment flows have helped maintain stability in the economy.

The performance of the nation’s non-oil sector has also been impressive. The National Bureau of Statistics (NBS) GDP report shows that the non-oil sector, especially the agriculture, services, wholesale and retail trade sectors, has been the major driver of overall growth.

Nigeria’s GDP growth rate of 6.56 per cent recorded in quarter one 2013 is above the SSA average of 5.6 per cent and way above the growth rates recorded in advanced economies. In addition, the banking sector and capital market have contributed to the stability in the economy as reforms implemented in these sectors, on the back of the financial crisis in 2007/2008, yielded positive results.

Call for Long term stability measures

Mr. Rewane said though the World Bank predicts a strong outlook for the Nigerian economy in the short term due to expected higher growth and lower inflation, the relative stability in the economy does not imply that the government should relax and do nothing.

“In fact, this is a call for action that will help sustain the positive economic performance” he said.

“The monetary policy and growth in the non-oil sector will not be sufficient to maintain economic stability in the long run. This is particularly true in view of security challenges in some parts of the country, which have the potential to obstruct economic activities and increase fiscal spending. Furthermore, growth in external reserves has remained stagnant at an average of 0.04% daily, partly due to the increased usage of the reserves to support the ex-change rate.”

According to him, the IMF noted that lower oil revenues and expenditure restraint by government would trigger an increase in fiscal deficits.

“In light of these challenges, other measures need to be put in place to mitigate the effects of a decline in global oil prices,” he said.

He said the production of oil needs to be bolstered in order to compensate for the fall in oil price.

“So far, the activities of pipeline vandals and oil thieves have resulted in a loss of crude oil produced. The Nigerian National Petroleum Corporation estimated that Nigeria lost N191bn ($1.23bn) to oil theft and vandalism in quarter one, 2013. An increase in oil production would help reserves accretion, which will enable the economy to withstand an external shock and will also cater for relevant fiscal spending purposes. Importantly, there is the need to further diversify the country’s export commodities in order to increase revenues,” he said.

He said the IMF also recommended structural reforms to enhance productivity and global competitiveness, including the conclusion of the power sector reform as a quick win for growth and competitiveness; the quick passage of the Petroleum Industry Bill to transform the oil and gas sector so as to increase investment being withheld by foreign oil companies pending the passage of the bill; and strict time-bound trade protection for infant industries.

Also, the World Bank suggested that the federal and state governments improve cooperation and policy coordination in macroeconomic management, market connectivity and public services.

“In conclusion, the Nigerian economy has managed to cope well despite a downward pressure in oil prices that was expected to destabilize the economy. However, we believe the current stability in the economy can only be maintained in the short term. The government must employ some important measures as noted above in order to prevent any instability in the longer term resulting from the decline in global oil prices,” he said.

Renaissance Capital, an investment bank, said if the nation’s production remains at current level, there would be pressure on the budget and future economic growth.

“Nigerian GDP having grown steadily at about 7% per annum over the past 10 years and with a population of 160mn, the country’s energy thirst is increasing (from the currently extremely low 300kb/d level). At the same time, if production remains at current levels due to under-investment, the net amount of barrels available for exports will shrink quickly putting further pressure on the budget and future economic growth,” the firm said.

The firm said apart from the obvious need to invest in future production by developing new areas such as deep offshore, as well as increasing recovery rates at old oil fields in the Delta, the biggest factor that could transform the Nigerian energy market would be the emergence of gas. “With 15bcm (billion cubic meters) of gas flared in Nigeria every year and many non-producing gas fields, it is only a matter of time before gas enters the Nigerian energy equation which should provide a major boost to the economy reducing the energy bill and increasing the amount of barrels available for exports”.


DOWNLOAD THE PREMIUM TIMES MOBILE APP

Now available on

  Premium Times Android mobile applicationPremium Times iOS mobile applicationPremium Times blackberry mobile applicationPremium Times windows mobile application

TEXT AD: Revealed!!! The Only Way Left of Getting an Extra Large Manhood and also Last Up to 38Mins+. Get the Insider Secret Here


All rights reserved. This material and any other material on this platform may not be reproduced, published, broadcast, written or distributed in full or in part, without written permission from PREMIUM TIMES.