The Centre for the Promotion of Private Enterprise (CPPE) on Sunday said the war between Israel and Iran portends a combination of risks and upsides for the Nigerian economy.
In a statement signed by Muda Yusuf, director of CPPE, the think tank said the outbreak has added a troubling dimension to the challenges of an already floundering global economy.
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“For the Nigerian economy, the implications are mixed. The development portends a combination of risks and upsides for the economy,” Mr Yusuf said.
On Friday morning, Israel launched air strikes on Iran. Israel claimed the strikes were pre-emptive to prevent Iran from building a nuclear bomb, but many countries consider the strike as unprovoked, as talks were still ongoing between Iran and the US over Iran’s nuclear programme, which it says is for peaceful means.
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In his statement on Sunday, Mr Yusuf said if the current conflict persists and escalates, the Nigerian economy may record upsides in forex inflows, revenue effect and oil and gas investment effect.
He explained that a major driver of energy prices in Nigeria is the global crude oil price.
Mr Yusuf added that the surge in crude oil price would impact on foreign exchange earnings, oil being the biggest forex earner for the country.
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This, he said, would even be more impactful if output performance improves.
“Crude oil price has surged to $75 per which is about 15 per cent higher than before the outbreak of the Israeli–Iran conflict. This development would also positively impact the country’s foreign reserves, ensure better forex liquidity and ultimately the stability of the naira exchange rate,” he said.
According to him, the oil sector currently accounts for about 50 per cent of government revenue.
He added that an improvement in crude oil price would therefore have a significant impact on government revenue.
“An improvement in revenue would positively impact fiscal consolidation and hopefully moderate the growth of the fiscal deficit. Investments in the oil and gas sector would post better returns if the conflict persists. High oil price is good news for upstream oil and gas investors,” he added.
Risk for the economy
Mr Yusuf said with the outbreak of the Israeli-Iranian war, crude oil prices had surged to $75 per barrel from $65 per barrel a week before. This is a 15 per cent jump within days.
“This has obvious implications for petroleum product prices globally.”
According to him, economies around the world including Nigeria would witness a surge in the price of petrol, diesel, jet fuel, gas and related products in the near term.
“This would have far reaching implications for many economies and businesses,” he said.
He noted that energy cost is a major factor in the Nigerian inflation equation.
“It impacts production cost, logistics cost, transportation costs, and the cost of power generation. This presents an inflationary scenario. These additional costs would be passed on to final consumers, depending on the degree of consumer resistance.”
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Mr Yusuf noted that high inflation drives interest rates as monetary authorities respond to the inflation outcomes of current geopolitical headwinds.
He explained that a tighter monetary policy regime is expected in Nigeria and other monetary jurisdictions.
“The expectation is that economies around the world may experience renewed pressures on interest rates. Higher global interests could adversely impact portfolio flows with implications for foreign reserves,” he noted.
Mr Yusuf further explained that high energy cost, elevated inflationary pressures and a spike in interest rates are all headwinds that could undermine the profitability of businesses in the economy.
He said investors in the non-oil sector are likely to be more vulnerable in the present situation.
“Nigerian firms with strong business links in the Middle East and those with strong supply chain linkages in the region would be vulnerable at this time because of the current instability in the region.
“There is a risk of high monetary growth with an increase in revenue from the oil sector. Money supply increases in the Nigerian economy as oil revenue increases because of the monetisation of oil receipts.”
This, he said, could pose additional inflation risk and exchange rate depreciation risk.
“This may provoke a tighter monetary policy stance, which could result in difficult credit conditions for businesses in the economy,” he said.
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