Recently, the crude oil price has been trending up, on account of recovery in demand and supply management. On the demand side, the opening up of economies in Asia and the resulting progression of industrial production to pre-pandemic levels have kept the pressure on the crude oil price. The Organization of Petroleum Exporting Countries and its allies (OPEC+) has also maintained their commitment to a production cut to prevent oil glut and sustain a favourable price of oil globally. As of 17th June 2021, the crude oil price was above US$70 per barrel.
Drawing from historical antecedents, the Nigerian economy has a near unitary correlation with global crude oil price since the economy is oil-driven. The failure of stakeholders to adequately diversify the economy away from oil to other areas of absolute advantages like agriculture, tourism, gas, and petrochemicals has sustained a reputation of revenue instability in the Nigerian government. With this said, it would appear that the recent surge in crude oil price is a good one for Nigeria. Quite right, the rise in crude oil price means more revenue for the government, but there are two anti-remarks to note. First, Nigeria is currently producing below its budget benchmark of 1.86mbpd (April:1.37mpbd, May:1.34mbpd). Second, the gain from the price hike is not fully realized because of the high cost of importing crude from abroad. Therefore, Nigeria’s gain from the recent trend of favourable oil prices is possibly at 50 – 60% of the total gains.
Most people believe that oil price is great for the Naira as it leads to reserve accretion, but this is far from the truth. While the oil price has been on the rise and fairly stable since the beginning of the second quarter of 2021, reserves have been declining and the CBN has ‘devalued’ the exchange rate from N379/US$ to the NAFEX rate. This is because the full gain of the increase in oil price is not fully realized in the first place. Besides, the CBN FX backlog is in the range of US$2bn or more. The CBN is also relying on the reserve to support the exchange rate, which is a phantom NAFEX rate. Put together, there has not been much impact of the recent rise in oil price on reserves and the exchange rate, which contradicts past trends like in 2014.
Despite the euphoria about the rising crude oil price, there are downside implications for Nigeria. The rise in global crude oil prices usually means a rise in domestic crude oil prices. While there are no changes in the pump price of fuel yet in Nigeria, it should be understood that the federal government bears the extra cost that would have been paid by Nigerians. A higher fuel subsidy cost on the government has different implications for the economy particularly lower revenue available to finance the budget (resulting in escalating fiscal deficit), and debt service becoming more burdensome. It is also interesting to note that the government bearing the cost of fuel subsidy does not necessarily absolve Nigerians of the cost. The government always finds a way to pass the cost to Nigerians once the cost of fuel subsidy becomes cut-throat. This is usually implemented through taxes, delayed implementation of wage review, and cut back in social security programmes.
It appears the Nigerian economy has evolved since 2014 from being an economy that derives a close to one-on-one gain from crude oil price through the impact on fiscal revenue, reserves, and exchange rates to an economy that is susceptible to weak oil-fiscal revenue linkage due to rising fiscal subsidy cost. The evolution of the economy in these seven years (2014-2021) is a function of the inability of stakeholders to keep oil production close to the budget benchmark, failure to develop local refineries to reduce import of crude, astronomical backlog of FX demand, and delay in converging the exchange rate (in the real sense).
To submit, the oil price rise is not necessarily a good or a bad one for the Nigerian economy as the economy has fundamentally changed. The net impact of both sides is what matters and stakeholders need to remain indifferent to oil price improvement and place more focus on developing the real sector of the economy and creating value exports from them.
Written by Michael Ogunremi
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