Standard Chartered says higher oil prices are no panacea to Nigeria slump – Businessday

Higher oil prices alone, is no solution to Nigeria’s economic growth slump, according to Razia Khan, the Regional Head of Economics, Africa, at Standard Chartered Bank, which forecasts oil prices will average $66 in 2017.Contrary to the benign picture painted of Nigeria’s economy by some economists on the back of a rallying oil price, Khan contends that “oil output and Nigeria’s ability to curb militancy in the Niger Delta, as well as the prospects of the non-oil economy, which accounts for 92 percent of Gross Domestic Product (GDP), will matter” just as much as oil prices. 

 
“Growth prospects will depend on how quickly unsustainable foreign exchange bottlenecks are resolved,” Khan stated in a Jan.9, 2017 note to clients.Although crude oil production rose to 1.78 million barrels per day (mbpd) in October 2016, from 1.65 mbpd, the average for January-October of 1.82 mbpd falls well short of the projection of 2.20 mbpd in the 2016 budget, which explains many of Nigeria’s macroeconomic woes, rather than low oil prices which averaged higher than the budgeted $38 per barrel, according to BusinessDay estimates.

Analysts at investment bank, FBN Quest are of the notion that “Diversification away from oil requires a healthy stream of oil revenues and that depends in turn on calm in the Niger Delta.”

The NNPC’s Financial and Operations Report for November notes that at least 300,000 b/d had been shut-in since February due to sabotage of the Forcados line by Niger-delta militant attacks.

“We understand that the Federal Government has restored monthly allowances to the former militants in the delta to the level under the previous administration. This step would have been taken reluctantly but cannot be faulted since it stands a reasonable chance of buying peace,” FBN Quest analysts, Gregory Kronsten, Olubunmi Asaolu and Chinwe Egwim stated in a note to clients on Jan 11.

Also more important than higher oil prices are prospects in the non-oil economy, according to Standard Chartered’s Khan.

Activity in the non-oil sector has been sluggish, hampered by poor policy choices, particularly a poorly functioning foreign exchange market.

The sector recorded an infinitesimal growth of 0.1 percent in the third quarter of 2016, according to data by the National Bureau of Statistics (NBS).

Despite several flawed attempts at currency flexibility, Nigeria has never fully embraced a liberalised foreign exchange regime.

The spread between the official and parallel market rate has ballooned to a record high of N185 per US dollar.

Khan observed that “The authorities are uncomfortable with allowing demand and supply to determine the value of the Nigerian naira,” which trades at N305/$ at the official window, but near N490/$ at the parallel market.

Because Nigeria has low levels of accumulated oil savings and its foreign exchange reserves have come under pressure, it has had to resort to curbing import demand in order to maintain a steady foreign exchange rate.

However, squeezing import demand has meant maintaining a severe squeeze on the real economy.

“Now, let’s be clear, imports themselves are not the problem, but a pegged naira,” said Olu Fasan, a political economy and international trade expert who is also a visiting fellow at the London School of Economics.

“The solution is not to ban or restrict imports, which is counterproductive, but to float your currency so that its value can adjust and regulate imports accordingly,” Fasan added.

Fasan observes that since the government partially floated the naira, imports have reduced, because the weak naira has made imports more expensive.

Yet, the government has refused to allow the full flotation of the naira.

“Indeed, recently, Buhari said: “I will resist the devaluation of the naira”. But the president can’t command the markets as he can order the military. Markets react to incentives, and one of them is a flexible, market-determined, exchange rate,” Fasan stated in a Jan.9 article in BusinessDay.

While the naira has plummeted almost 40 percent since central bank Governor Godwin Emefiele in June ended a 15-month peg to the dollar, traders say it’s still being managed by the government.

President Muhammadu Buhari, who likens devaluation to murder, and the Central Bank of Nigeria (CBN) have stood their ground for a very long time by not allowing the naira to float freely, according to Aminu Gwadabe, the president of Bureau De Change operators.

Gwadabe told reporters on Tuesday that the BDCs will now post an exchange rate each Monday on their website from Jan. 16 to “highlight positive rate development in the market” and counter domains such as abokifx.com, which publishes unofficial prices daily.
This is believed to be in a bid to help the central bank combat unregulated trading.

“It will bring transparency to the foreign exchange market which is good for investor confidence, but it is not going to increase the stock of dollars in the market which is the biggest problem,” said Ayo Akinwunmi, head of research at FSDH Merchant Bank by phone.