ANALYSIS: How crashing oil prices may mount pressure on naira devaluation

By Isa Amodu, Abuja

The slump in oil prices is mounting pressure on Nigeria’s economic team to devalue the naira as dwindling export revenue has depleted foreign-exchange reserves, thereby limiting the central bank’s ability to support the naira.

As it stands, the central bank’s reserves have decreased by 20% in the past two years to the lowest since November 2017, and may soon reach the $30 billion threshold set by Governor Godwin Emefiele for the country to consider a devaluation.

The central bank may start adjusting currency policy before it reaches that point, they said.

Analysts say naira is on an unsustainable trajectory and under current external conditions, especially lower oil prices, the risk of a devaluation is “high”.

Also, analysts predict that the combination of a current-account deficit previously due to strong imports but now being compounded by weak exports, coupled with portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira.

The naira extended a decline in offshore trading, slipping  420 per dollar, the weakest level on a closing basis in almost three years before it later bounced back to N365 per dollar.

Also, Yields on Nigeria’s 2049 Eurobonds climbed 11 basis points to 10.34%, a record, after soaring 149 basis points. However,  Nigeria’s benchmark stock index slumped 4.1%, heading for the lowest close since March 2017.

President Muhammadu Buhari signed the country’s 10.6 trillion naira ($29 billion) budget into law this year based on a crude price projection of $57 a barrel and targeted oil earnings of 2.64 trillion naira.

Currently, crude prices have slumped about 45% this year to around $36 a barrel.

As Africa’s largest oil producer, Nigeria relies on earnings from the black commodity for more than 90% of its export revenues.

The International Monetary Fund slashed the West African nation’s economic growth projection to 2% from 2.5% because of a decline in oil prices.

Under Emefiele, who was appointed in 2014 and re-appointed in 2019 for a second term, Nigeria has tightened capital controls and closely managed the naira’s value.

The governor has consistently said this is the best way to curb inflation and boost manufacturing by discouraging imports.

It is predicted that an initial attempt at a managed depreciation is more likely than a one-off large devaluation (like in the past), but it might be challenging to maintain over the medium term unless bolder policy action is taken.

The central bank could also consider tightening liquidity in the interbank market or by tightening policy, while a planned Eurobond sale could help rebuild currency reserves.

GovernanceNews reports that Mele Kyari, the group managing director of the Nigerian National Petroleum Corporation (NNPC), says Nigeria would be out of business if the price of crude oil drops as low as $22.

Speaking recently at a consultative roundtable meeting organised by the Central Bank of Nigeria, he explained that about 12 cargoes of liquefied petroleum gas (LPG) cargos got stranded globally because they had no hub due to abrupt collapse in demand associated specifically with coronavirus.

“It has also hit other sectors from the production stage which is the liquid crude,” newsmen quoted him to have said.

“As at today with the Nigerian crude, we have 50 cargoes that have not found landing; it means the traders have purchased it but they don’t know how to take it.”

“Iraq dropped its price by five dollars and Saudi Arabia by eight dollars in some locations. So, when your crude oil sells at $30 and you’re dropping it by eight dollars, it means that in the market, you’re selling it at $22.

“This is a huge problem that can be accommodated in some production environment like in Saudi Arabia.

“Today, the best of our production system is $15 to $17 a barrel, there are many countries whose cost of production is $30 and we’re one of them. So, when the price now goes to $22 and we’re producing at 30 dollars, that means we’re out of business.”

What Next for Nigeria?

The minister of Finance, Budget and National Planning, Zainab Ahmed has already called on the relevant agencies in the country to commence a robust plan and live a life after oil.

She said the slump in oil prices and effects on Nigeria’s economy still shows how the country still volatile to crude oil shocks.

She said the federal government had initiated plans to form a savings policy to reduce the volatility of the country’s economy to external shocks.

“We also need to mobilize local savings, even before the crash of the crude oil price the Ministry of FBNP has reached out to the private sector and formed a committee to fashion out a National Savings Policy. This will enable us infuse into the Capital Market various instruments to suite several investors need. This will include long term instruments that will be suitable for investor groups that have patient capital such as Pension Funds,” she said

GovernanceNews had also reported earlier that President Muhammadu Buhari has set up a panel headed by the finance minister to review oil benchmark prices which was earlier pegged at $57 per barrel in the 2020 budget.

However, analysts have maintained that Nigeria must shift from oil and focus more on agriculture and manufacturing sector, or else the country’s economy will still be vulnerable to external shocks which may also translate to recession.