Oil Rout Damage Nigeria’s 2015 Budget As Economists See Naira Devaluation

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The sustained fall in global benchmark crude, which has continued to trade below Nigeria’s oil price benchmark for this year’s budget in recent days, has wiped off any accretion to the country’s Excess Crude Account.

Economic experts told our correspondent on Friday that the further decline in oil prices had raised the prospect of another devaluation of the naira.

On August 3, Brent crude, against which Nigeria’s oil is priced, plunged below the $50 per barrel mark, for the first time in six months. It fell to $48.87 per barrel on Friday.

The steep decline in oil prices had in March forced the National Assembly to settle for $53 per barrel as the oil benchmark price for 2015 budget, down from $65 proposed by the Executive, which had to adjust it twice, from $78 to $73, and later to $65.

Oil prices have recently shown signs of stabilising, with Brent trading at $68 per barrel in May, after losing about 60 per cent of its value between June 2014 and January this year. It reached a peak of $115 per barrel in June last year.

The Global Chief Economist, Renaissance Capital, Mr. Charles Robertson, said, “The lower oil price is going to be painful for the budget. It means less money is available for much-needed investment in infrastructure.”

One way to mitigate this would be by letting the currency to depreciate – as Russia had done, Robertson told our correspondent in an emailed response to questions on Friday

The naira has fallen by about 22 per cent against the United States dollar in the past year as the Central Bank of Nigeria was forced to devalue the currency in November 2014 and February this year.

The CBN will have to devalue the naira at some stage, possibly by more than 15 per cent, a global ratings agency, Standard & Poor’s, said last month.

The Head, Economic Research, Ecobank, Mr. Angus Downie, noted that the low oil price environment had continued to add pressures to Nigeria’s economy, particularly the exchange rate because of the relatively low level of forex reserves.

Downie said, “If oil prices remain low, and given the relatively weak level of forex reserves, economic and financial pressure will remain acute: import demand will have to be managed further, government spending will need to be cut and the exchange rate expectations will need to be adjusted with the possibility of another devaluation being brought in by the CBN.”

He said the government could increase the efficiency of its spending by making spending more accountable to reduce waste and funds leaking from the system.

Government could also seek to diversify its fiscal and export revenue streams away from hydrocarbons, which would mitigate some of the pressure caused by the low oil price, Downie added.

A professor of financial economics at the University of Uyo, Akwa Ibom State, Leo Ukpong, said in a telephone interview with our correspondent that the continued fall in oil price would hit budgeted capital projects as the government would be forced to scale down or cancel some projects.

“It is going to put pressure on the government to go to the capital market to borrow money, thus domestic debt will rise, with higher interest rate in the market,” he said.

It would also put pressure on the foreign reserves as the government would have to draw down on the reserves, Ukpong said, adding that the naira would take a further beating.

“The pressure will be to devalue the currency,” he said.

The ECA, into which the country saves the difference between the market price of oil and the budget benchmark to provide a cushion when prices fall or extra cash is needed for spending on infrastructure, was rapidly depleted in the fourth quarter of last year as oil revenues plunged.

The account, which stood at about $4.11bn in October 2014, dropped to $2.45bn in December, down from about $3.11bn in November.

The Ministry of Finance had in May put the opening balance of the ECA in 2011 at $4.56bn; it reached a peak the following year at $8.7bn before declining to $2.3bn in 2013.

The balance in the ECA as of May 2015 was $2.07bn, according to the ministry.

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