Budget crisis in 2019 stares
THERE ARE FEARS that Nigeria and other African producers of crude oil may experience budget implementation crisis in 2019 as their main foreign exchange earner, oil, is going through a turbulent time
ARE FEARS that Nigeria and other African producers of crude oil may experience budget implementation crisis in 2019 as their main foreign exchange earner, oil, is going through a turbulent time in the international market.
Crude oil price (Brent) in January 2018 was $69 per barrel and rose to $81 in October. However, efficient production by American oil companies and some non OPEC producers has led to a glut in the market, forcing the price to fall. It is a story of supply and demand - too much supply and not enough demand.
Brent has been down as much as 2% to $58.31 but it is now trading closer to $58.50. The price is on a losing streak not seen since the financial crisis. The price of Brent - and US light crude - has fallen more than 20% in November.
With OPEC pushing for production cuts, Nigeria may have to grapple with reduced revenue against mounting expenditure and this may lead to project stoppage and further increases the fiscal pressure.
Last week, Saudi Arabia’s oil minister, Mohammed Al Falilh was in Nigeria to canvass support for production cut from Nigeria just as he toured other oil producing states. Russian, a non OPEC producer has also agreed to cuts. Thus, the stage is set for the oil producers to implement the cut.
An analyst, FSDH recently said a significant drop in either the price of crude oil or production will directly have a negative impact on the fiscal position of the country, in addition to causing major macroeconomic instability, particularly in the exchange rate and inflation rate. FSDH Research analysis of the HY1 2018 Foreign Trade Statistics released by the National Bureau of Statistics (NBS) shows that crude oil exports accounted for 80% of total exports.
“Oil revenue represents a significant proportion of Nigeria’s revenue. Lower revenue will mean the government may not be able to undertake necessary capital expenditure and will hinder economic growth. It may also lead to a devaluation of the currency because of a drop in the foreign exchange supply.
A rising inflation rate will be associated with currency devaluation; and naturally, the monetary policy response to a rising inflation rate is to increase interest rates.
These likely scenarios will lead to an increase in finance costs for both companies and government. An economic recession is not far from these developments. These were the events that happened in Nigeria from 2014 through to 2017”’ the FSDH report said.
Similarly, the United States’ Energy and Information Administration (EIA) expects oil prices to decline in the coming months because global oil inventories are expected to rise slightly during the second half of 2018 and in 2019.
According to EIA, expected inventory growth results from forecast oil supply growth outpacing forecast oil demand growth in 2019. Analysts believe this can only bring more problem for the country.
According to EIA, expected inventory growth results from forecast oil supply growth outpacing forecast oil demand growth in 2019
L-R: Aigboje Aig-Imoukhuede, ex-officio,The Nigerian Stock Exchange (NSE); Olawale Oluwo, commissioner for energy and mineral resources, Lagos State; Oba Otudeko, past president, NSE; Mary Uduk, acting director general, Securities and Exchange Commission (SEC); Oscar N. Onyema, immediate past president, African Securities Exchanges Association (ASEA)and CEO, NSE; Yemi Osibanjo, vice president of Nigeria; Abimbola Ogunbanjo, president, The Nigerian Stock Exchange (NSE); Karim Hajji, new president ASEA and CEO, Casablanca Stock Exchange; Aruma Oteh,vice president and treasurer,World Bank; and Yetunde Odejayi, personal secretary, deputy governor’s office, Lagos State, during the 22nd African Securities Exchanges Association annual conference at Oriental Hotel, Lagos, recently