The oil price has continued on a free fall and analysts are already forecasting $60 per barrel as average for 2015. The implication for a Nigerian economy which runs mainly on a single commodity is dire and we foresee the following as challenges:
- EXCHANGE RATE VOLATILITY: 95% of foreign exchange earning is tied to oil and with shortened revenue in dollars terms, the Naira will be under continuous pressure. The monetary policy committee has already devalued the Naira, shifting the band from N155 to N168 to $1. Despite devaluation, Nigeria will earn less revenue from oil and gas exports and imports of household items will be more expensive, with the burden passed on to Nigerians.
- SAVINGS STAGNATION: with the excess crude account at $4.11bn, declining oil prices means that Nigeria might not be able to add additional revenue due to pressure from states who also run high recurrent expenditure. It might also be difficult for FG to save funds in the sovereign wealth fund, considering the austerity measures of the times. Accretion to the external reserve is expected to slow with falling crude oil.
- DEBT SPIKING: debt servicing will possibly rise, especially foreign debts and Nigeria will need more fund to cover budget deficit (difference between accrued revenue and expenditure). With stagnated excess crude account savings, raising debts is the glaring alternative. The balance of the special accounts (ecology, stabilization and natural resources accounts)- which the FG borrowed N224bn fro m to augment a deficit- is currently unknown. We doubt the legality of this and also if this and also if this will be enough to close the gap between shrinking revenue and expenditure.
- CAPITAL EXPENDITURE UNDER THREAT: The haste to spend on recurrent items will remain, as they are fixed charges, unless drastic reforms such as downsizing personnel sharp cuts in overhead costs occur. Capital expenditure performance might be threatened by lower oil prices as government strives to keep its deficit within the limits of the fiscal responsibility act whilst ensuring it meets its day-to day obligations.
- EMPLOYMENT: the public sector is still is still the largest employer of formal labor and with cut government expenditure due to falling oil, prices, and with cuts to number of new jobs will actually continue on a decline, following recent trends form 22,644 in Q3 2012 to 5,735 in Q3 2014(NBS Estimates 2014). The private sector will have to lead the way for employment opportunities in Nigeria.
From opportunity reforms by Budgit
Image Credit: Seanews