For Nigerians, and indeed millions of people across the world, the Covid-19 crisis has caused incredible hardship.The biggest danger however are the multiple hits that the oil sector will face.
Despite last week’s decision by OPEC+ to cut 9.7 million barrels in May and June, the oil price still remains sluggish. The Covid crisis has led to a literal shut down of several countries in the world. Industries and businesses are shut. Oil consumption has gone down.
The Federal Government has had to cut its crude oil benchmark by 47.3% to $30. It goes without saying, that the country will also have to cut its production volumes, following the agreement reached by OPEC+. The country’s production quota has been reduced to 1.4 million barrels per day.Prior to this, it was lowered from 2.18 million barrels to 1.70 million barrels per day.
The country also has unsold crude oil cargoes.
The uncertainty around the economy has led to foreign investors exiting. That in turn worsens the pressure on foreign reserves. The Central Bank of Nigeria (CBN) had earlier in the year adjusted the currency from N306 to N380 on the Investors and Exporters (I and E) window. Another adjustment is inevitable.
The government is also affected in terms of revenue. 70% of government revenue comes from crude oil. 90% of the country’s foreign exchange.
Crude oil is literally the lifeblood of the Nigerian economy. 70% of government revenue comes from crude oil. 90% of the country’s foreign exchange.
In 2016, when there was a sharp fall in crude oil prices, it drove the economy into recession. There was a 36% devaluation of the currency, and additional adjustment the following year. While the economy recovered, growth was weak at 2.27% for 2019. Way lower than the circa 3% population growth rate.
Nigeria’s Minister of Finance, Zainab Ahmed, a few weeks ago disclosed that the Federal Government is seeking a total of $6.9 billion from multilateral organizations. $3.4 billion is being sought from the International Monetary Fund, $2.5 billion from the World Bank and $1 billion from the African Development Bank (AfDB). It would take a few weeks however, for the funds to come through.
The government is also making moves to withdraw from the stabilization fund of the Sovereign Wealth Fund (SWF). That however is to augment the FAAC allocation for June. So what then happens after that?
In the words of the defunct PSquare.
I dey see danger (danger wahala dey)
You go see danger (danger wahala dey)
Omo see danger (danger wahala dey)
We dey see danger (danger wahala dey)
Omo wahala dey