Falling Oil Prices, Threat to Economy — LCCI

• Falling Oil Prices, Threat to Economy — LCCI

The Lagos Chamber of Commerce and Industry has said that if the trend of declining global oil price continues, it will pose a major risk to the Federal Government’s economic projections for 2019 fiscal year and adversely impact its Medium Term Expenditure Framework.

The chamber noted also that the situation would further threaten the current minimum wage negotiation between the government and organised labour.

Data from the Organisation of Petroleum Exporting Countries show that oil prices were trending down at $59.96p/bl on November 29 from $88p/bl one month ago. This is below 2019-2021 MTEF benchmark of $60p/bl.

Analysts have described the slump in oil prices as the equivalent of a tax hike and tax cut in oil exporting and importing economics respectively.

According to estimates by Capital Economics analysts, every $10-per-barrel fall in oil prices boosts incomes by about 0.5 to 0.7 per cent in the Gross Domestic Product of major emerging market oil importers.

LCCI noted that the same discount would cause a three to five per cent decline in the GDP of most of the Gulf economies, and a slowdown of 1.5-2 per cent of GDP in Russia and Nigeria on an annualised basis.

“This is not good news for the Nigerian economy which remains fragile with Gross Domestic Product growth of less than two per cent,” it said in a statement signed by its Director- General, Muda Yusuf, on Monday.

Speaking further, Yusuf warned that the domestic foreign exchange market was already responding to recent sharp fall in oil prices, citing the drop in the local currency from N363/$ to N370/$ in the parallel market.

He said, “There are fears that the sharp fall in oil prices if sustained could lead to a shortage of the United States dollar as capital flow reversals intensify, as oil price weakens, and as foreign reserves come under pressure.

“There are worries that the capacity of the Central Bank of Nigeria to sustain the current levels of intervention in the forex market will be tested. Reserves currently stand at $42bn, down from $48bn five months ago.

“The improvement in liquidity and relative stability in forex market witnessed by businesses in 2018 will come under threat due to declining receipts from oil.

“This will have profound impact on the prices of imported goods and services leading to likely increase in the rate of inflation.”

He added that the fiscal operations of government would be adversely affected, further threatening the on-going discussion around new minimum wage.

He added, “Despite sustained efforts by government to improve the business environment, Foreign Direct Investment inflows remain stagnated. The capital account faces significant uncertainty, as external portfolio investors exercise further caution due to developments in the global financial markets and the forthcoming general elections in 2019.”

The LCCI DG listed some key policy reforms that should be adopted by the government to support and sustain the stability of the macroeconomic environment.