Falling Oil, Foreign Reserves and Nigerian Economy

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  • Falling Oil, Foreign Reserves and Nigerian Economy

Since the OPEC and non-OPEC reached an agreement to extend production cut by another 9 months in May. The Brent crude oil has plunged about 18 percent to $44.35 a barrel on Wednesday, a price level described by many oil experts as the bear region.

While Nigeria’s production level is expected to rise by 250,000 barrels per day in coming months, the weak global oil prices pose a challenge to the Nigeria’s foreign revenue and economic recovery.

Foreign Reserves

It is not a co-incidence that the foreign reserves declined by $702 million from $30.9 billion recorded in May to $30.2 billion in June. Even with the projected surge in output level, the nation will have to discount its product to attract buyers as demand is at a record low. Therefore, the foreign reserves may plunge even further, except the Investors and Exporters forex window attract substantial foreign direct investment to offset revenue deficit. Depending on if the Central bank can still sustain its 30 percent contribution to the window.

This, further put the ongoing forex intervention in question. Can the central bank sustain more than $4 billion forex intervention program at a lower oil price of $44-$40 a barrel? A price below the 2017 oil benchmark of $45 a barrel.

Economy

Accordingly, the forex intervention helped curtail consumer prices from 19 percent to 16.25 percent in May and boosted forex liquidity. Subsequently, manufacturing activities surged to 52 in May to sustain April expansion, while the foreign exchange rate of the Naira improved to N365 a dollar. It’s lowest in over 6 months.

However, the continuous falls of the oil prices may hurt current progress and delay economic recovery more than anticipated by investors and businesses.  This is because as the pace of increase of the foreign reserves wind down forex intervention will gradually reduce and so is the economic activities.

Therefore, the government either up its production level to sell more at a cheaper price or hope OPEC will cut production further as hinted by Iran on Wednesday to sustain the ongoing progress and gradually revamp the economy.

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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