With global oil price falling below $85 per barrel, Nigeria would be worst-hit if this drop should persist. With much of the government’s revenue funded by oil, funds for its capital and recurrent spending is heavily reliant on the income from the commodity, so too is its fund for savings.
Nigeria’s Excess Crude Account as well as Sovereign Wealth Fund and other savings schemes with which the country weathers unforeseen storms are all funded by oil revenues.
The continuous fall in oil price will dry up funds and the country’s ability to withstand shocks.
Although Nigeria has $4.1 billion in its excess crude account – money kept for such oil price shocks – it is still a little far off the World Bank advised sum of $6.3 billion.
Despite Ngozi Okonjo-Iweala, Finance Minister and coordinating minster of the Economy, assurance of government “being on top of the game”, fears remain alive that if oil price perpetually falls, the government’s saving-ability could become weakened.
Nigeria’s foreign exchange reserves fell to a 4-month low of $37.9 billion as of November, down 3.99 percent month-on-month after the central bank sold dollars to banks to prop up the value of the naira currency.
“If oil prices continue to drop it will affect our ability to generate dollars earnings,” according to Sewa Wusu, head of Research, Sterling Capital Markets Limited.
“That will put pressure on our local currency. That is why the naira continues to drop”, he adds.
The naira weakened as low as 173.15 per dollar before paring losses to trade at 172.84 per dollar on Thursday. The currency is the biggest decliner among 24 African currencies monitored by Bloomberg that day.
The Central Bank of Nigeria (CBN) said last week that it will continue to defend the local currency, which has fallen 6 percent so far this year on concerns about lower oil prices and an exit from the local debt and equity markets by offshore investor.
CBN said it restricted banks use of the standing deposit facility, which allows companies to earn interest on excess cash, in an attempt to encourage lending to local businesses.
Nigeria’s reserves running at four-month low and the oil price collapse preventing any replenishment, the naira is a prime candidate for an attack by speculators, who build up short positions by borrowing and selling a currency in hope of profiting from a swift exchange rate plunge.
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“The markets are starting to see the blood here,” said Emad Mostaque at Eclectic Strategy, a consultancy set up by former Deutsche Bank veteran John-Paul Smith.
“We are now entering a particularly dangerous period for the naira as time constraints and low resources to fight against speculative attack make the currency vulnerable. Everything is lining up for that currency attack”, he said.
Analysts say oil prices will continue to fall even if OPEC countries agree to cut production later this month.
Gary Ross, chief executive of Pira Energy Group, said there was an “imbalance” between supply and demand that would force prices down next year regardless of any output cuts that could be announced by the oil exporters’ group at its meeting in Vienna on November 27.
“OPEC cannot and would not take the pain necessary to correct the imbalance”, he adds.
Market watchers are also predicting further falls in prices, they expect cash price of internationally-traded Brent crude to drop to about $70 a barrel or lower.
Brent crude extended losses from a four-year low, falling as much as 1 percent to $79.55 a barrel.
JOSEPHINE OKOJIE
