Should oil prices continue to decline and fall below Nigeria’s Medium Term Expenditure Framework (MTEF) benchmark of $60 per barrel, the impact on the country’s economy could include the naira depreciating to $380/$, analysts at Financial Derivatives Company (FDC) have predicted.
In a note obtained by newsmen last weekend, the experts also forecast that such a steep drop in oil prices will negatively affect key economic indicators like the external reserves and the country’s economic growth forecast.
Specifically, they said: “Although Nigeria remains oil production sensitive relative to price, an oil price below the MTEF oil benchmark of $60pb distorts the fundamental pillars of the budget plan. In addition, a possible cut in Nigeria’s oil quota by 200,000bpd could deal a significant blow to Nigeria’s fiscal consolidation efforts.
“This will force the government to revise its spending, possibly pulling the economy into a technical recession. This will weigh on key indicators such as the economic growth forecast of 3.01% in 2019, external reserves will move south of $40bn and exchange rate will depreciate by at least 5.4% to N380/$.
“This is also expected to widen Nigeria’s budget deficit, exerting more pressure on Nigeria’s current debt profile and debt servicing obligations.”
Global oil prices have fallen from a high of $86 per barrel last October, to $59.80pb at the end of November, the sharpest monthly decline in over five years.
According to the FDC analysts: “The downward spiral in prices can be attributed to a combination of factors – higher expectations of a supply glut and lower than anticipated global growth in 2019.”
They pointed out that while industry experts are optimistic that the decline recorded so far is, “aberrational and is more of a knee jerk market reaction to the current global trends,” the increased momentum in the industrial efforts of key emerging economies is likely to sustain current demand levels for crude oil.
Specifically, they noted that the rise in the number of Chinese refineries should see oil demand strengthen gradually from 2019.
Last Thursday, dollar shortage occasioned by rising demand for the greenback sent the naira crashing to N370 per dollar from N363/$ in the parallel foreign exchange market, the local currency’s lowest level since August 2017.
Traders, who attributed the development to a surge in the demand for dollars, disclosed that some operators had resorted to hoarding the greenback due to speculation that the recent sharp fall in oil prices could lead to a shortage of the U.S. currency.
However, reacting to the naira’s depreciation in the parallel market, a CBN official, who did not want to be named, said that there was nothing unusual about the local currency coming under pressure at this time especially given that the October disbursement of the Federation Accounts Allocation Committee (FAAC) was shared by the three tiers of government only a few days ago.
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