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Nigeria to Struggle Amid low Oil Prices, Weak Reserves

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  • Nigeria to Struggle Amid low Oil Prices, Weak Reserves

President Muhammadu Buhari on Monday sets up a new committee to review the impacts of low oil prices on the 2020 budget following a 30 percent decline in oil price on Monday, bringing the year-to-date decline to 49.5 percent.

Crude oil plunged from $71.28 per barrel it traded in January 2020 to $31.26 on Monday before pulling back to $36.03 a barrel after Saudi Arabia and other OPEC+ members failed to convince Russia to agree to an additional cut of 1.5 million barrels per day to artificially prop up oil prices as more cases of coronavirus weighs on global oil demand, especially from China, the largest importer of the commodity.

UKOilDaily 7President Muhammadu Buhari had passed a N10.59 trillion budget for the year with oil price benchmarked at $57 per barrel while crude oil production was assumed at 2.18 million barrels per day. The administration estimated that about 35 percent or N3.7 trillion of the N10.59 trillion budget would come from oil revenue while the N2.18 trillion estimated deficit would be financed through foreign and domestic borrowing and the 50 percent increase in Value Added Tax (VAT) and other locally generated revenue would take care of the rest.

But with crude oil trading at $36.03 a barrel, the federal government is losing $20.97 per barrel assuming production level remains 2.18 million barrels per day. That represents a daily decline of $45,715,600 (218,000,000 X 20.97).

However, Nigeria is not producing 2.18 million barrels per day going by OPEC report for December and January. Nigeria’s oil production stood at 1.57 million barrels per day in December and 1.77 mbpd in January, according to an independent oil tracking agency, CEIC. Another report from Bloomberg painted a sad picture of the country’s current position, the report stated that 70 percent of the nation’s April sales have no buyer despite huge discount being offered. The story is not different for Angola and other oil-producing economies. The difference, they have alternatives and effective diversification plans.

In February, the International Monetary Fund (IMF) downgraded the nation’s growth projection for the year from 2.1 percent to 2 percent, citing slow economic recovery amid weak revenue to debt profile. In the same month, Standard and Poor lowered the nation’s credit rating from stable to negative, again citing weak revenue, falling oil price and limited space for stimulus.

The nation’s foreign exchange reserves declined from $45 billion recorded in June 2019 to $36.2 billion in March 2020 as oil price continues to decline so do the nation’s reserves which the main source of funds is crude oil. High importation, capital flight, and weak capital importation are some of the challenges hurting Nigeria’s liquidity.

Inflation rate rose to 12.13 percent in January, eroding consumer spending, retail sales and household income despite a high unemployment rate of 23.1 percent or 20.9 million unemployed people. With the foreign reserves fast declining, credit agencies downgrading the nation’s credit rating and global growth projected to slow down in 2020, the nation would struggle to sell its Eurobond scheduled for September as it did in 2018 when it sold $2.86 billion at a period when crude oil was averaging $70 per barrel.

Even if Mrs. Zainab Ahmed, Minister of Finance, led committee reviewed down the $57 oil benchmark for the year, it still would not address the nation’s low oil production in recent months, rising capital flight, weak capital importation, unclear policy path discouraging investors and the rising cost of servicing debt.

Nigeria spent N2.1 trillion or 22.24 percent of the 2020 budget servicing debt in 2019, that financial obligation continues in 2020 and could surge in subsequent years after the Senate approved an additional $22.7 billion loan for President Muhammadu Buhari.

Despite the aggressive economic diversification approach built around low-interest rates anchor borrowers’ loan of President Muhammadu Buhari administration, Nigerians still crave visible results after years of spending. New job creation remains low with businesses shutting down operations, especially local companies.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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CBN’s Monetary Policy Raises Concerns Over Nigeria’s Q2 Growth

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Central Bank of Nigeria (CBN)

Nigeria’s economic outlook for the second quarter of 2024 is clouded with uncertainty as economists and analysts express concerns over the impact of the Central Bank of Nigeria’s (CBN) aggressive monetary policy.

Following a series of interest rate hikes aimed at curbing inflation, there are growing fears that these measures could stifle economic growth in Africa’s most populous nation.

The National Bureau of Statistics (NBS) reported that Nigeria’s Gross Domestic Product (GDP) grew by 2.98 percent in real terms in the first quarter of 2024, up from 2.3 percent in the same period of 2023.

However, this growth represents a slowdown from the 3.46 percent recorded in the fourth quarter of 2023.

The outlook for the second quarter is less optimistic with predictions of slower growth due to the CBN’s tightening measures.

“The year-on-year growth makes sense given that in the first quarter of last year, we were affected by the uncertainty about currency replacement, fuel queues, and elections,” said Ayo Teriba, CEO of Economist Associates.

“However, the tightening measures by the CBN that started in February are likely to take their toll in Q2 and subsequent quarters.”

Last week, the CBN raised its monetary policy rate by 150 basis points to 26.25 percent, marking the third consecutive hike.

This brings the total increase since February to 750 basis points, a move designed to combat inflation and defend the naira.

Analysts at FBN Quest warned that these rate hikes could slow economic growth and reduce consumer spending.

“Ultimately, the impact on the general economy could be a potential slowdown in economic growth, with consumer spending suppressed, and a decrease in business investments,” FBN Quest stated in a recent note.

The NBS report also highlighted that the services sector was the primary driver of GDP growth in the first quarter, recording a 4.32 percent increase and contributing 58.04 percent to the aggregate GDP.

The agriculture sector grew by 0.18 percent, a modest improvement from the -0.90 percent recorded in Q1 2023.

Meanwhile, the industry sector grew by 2.19 percent, up from 0.31 percent in the first quarter of 2023.

Ikemesit Effiong, head of research and partner at SBM Intelligence, noted that services have significant exposure to monetary policy effects.

“Since growth was largely powered by services, I would expect some slow growth in Q2. But I don’t think the slowdown might be actually significant. It might just be around 2.4-2.5 percent.”

Analysts at Comercio Partners observed that the GDP growth rate has been slower yet steady, hovering around three percent from 2021 to 2023.

However, they warned that the CBN’s rate hikes could have a deleterious effect on growth.

“The central bank had hiked the MPR by a hefty 600 basis points to 24.75 percent to curb inflation in March. Despite these efforts, inflation has been stubbornly high, hitting a record 33.69 percent in April, eroding consumer purchasing power. The increased interest rate has also raised the cost of borrowing for real sectors, stifling economic growth,” Comercio Partners noted.

President Bola Tinubu’s recent economic reforms, including the removal of a costly petrol subsidy and the lifting of currency controls, have exacerbated inflationary pressures, further complicating the economic landscape.

The naira has suffered a near 30 percent devaluation this year, following a 40 percent devaluation last June. Rising inflation has weakened consumer purchasing power, while businesses grapple with higher operating costs.

Muda Yusuf, CEO of the Centre for Promotion of Private Enterprises, highlighted the importance of oil output in sustaining growth.

“We might see positive growth in Q2 if the improvement in oil production is sustained and the CBN is able to reduce volatility in the forex market because it is affecting confidence and fueling speculation,” he said.

Joseph Nnanna, Chief Economist at the Development Bank of Nigeria, cautioned that the latest rate hike could impede real sector growth and hinder GDP growth this year.

“The 150bps rate hike is pernicious to the real economy as households and MSMEs will feel the impact immediately,” Nnanna said.

“However, the rate hike has a signalling effect on the fiscal authorities. They need to improve fiscal discipline and prioritize spending to improve growth.”

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Bank of Ghana Set to Maintain Interest Rate at 29% Amidst Inflation Concerns

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Ghana one cedi - Investors King

The Bank of Ghana is anticipated to keep its benchmark interest rate steady at 29% to curb soaring inflation and stabilize the nation’s currency, the cedi.

This decision comes as Governor Ernest Addison prepares to announce the monetary policy committee’s (MPC) verdict later today in Accra.

According to a survey conducted by Bloomberg, most economists expect the MPC to maintain the current rate in an effort to control inflation, which has averaged around 25%, and to support the struggling cedi.

The Ghanaian currency has depreciated by approximately 10% against the US dollar since the MPC’s last decision to keep borrowing costs unchanged in March, marking it as the worst-performing currency globally over this period.

“I expect the Bank of Ghana to keep the policy rate on hold in May in order to bolster the cedi and prevent higher import prices from keeping inflation at the currently elevated level,” stated Mark Bohlund, a senior credit research analyst at REDD Intelligence.

The cedi’s decline has been significantly impacted by a sharp drop in cocoa earnings, with revenue from cocoa exports falling by 49% to $599 million in the first four months of this year.

Ghana, the world’s second-largest producer of cocoa, has faced adverse weather conditions, disease, and a fertilizer shortage, all contributing to decreased output.

In an effort to manage its economic challenges, Ghana is reorganizing most of its $42.2 billion debt as part of conditions for a $3 billion program from the International Monetary Fund (IMF).

Last Thursday, the nation received a draft agreement to restructure debts with its official creditors, a necessary step to secure a $360 million disbursement from the IMF expected by the end of June.

Economists like Bohlund and Courage Boti, of Accra-based GCB Capital Ltd., suggest that the MPC might be in a position to consider cutting rates at its July meeting.

They anticipate that the currency could start to recover with the forthcoming IMF disbursement, and the favorable base effects could lead to a sharp slowdown in inflation.

“The more appropriate time to look at a rate cut will probably be July, by which time the currency pressures would have eased and its full impact assessed,” said Boti.

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Agricultural Sector’s Contribution to GDP Decreases in Q1 2024

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Agriculture - Investors King

Nigeria’s agricultural sector declined in its contribution to the Gross Domestic Product (GDP), according to recent data released by the National Bureau of Statistics (NBS).

The sector, which encompasses crop production, livestock, forestry, and fishing, experienced a decrease in its nominal growth rate compared to the same period in 2023.

The data reveals that the agricultural sector grew by 0.77% year-on-year in nominal terms in Q1 2024, a decrease of 4.47% points from the corresponding quarter of the previous year.

This decline is significant, especially when compared to the growth rate of 14.94% recorded in the preceding quarter, showcasing a downturn of 14.17% points.

Crop production emerged as the primary driver of the sector, constituting 87.98% of the overall nominal value of the sector in Q1 2024.

However, despite its dominance, the sector’s contribution to nominal GDP stood at 17.22%, reflecting a decrease from the rates recorded in both the first quarter and fourth quarter of 2023, which were 19.63% and 24.65%, respectively.

In real terms, the agricultural sector experienced a modest growth rate of 0.18% year-on-year in Q1 2024, indicating an increase of 1.08% points from the same period in 2023.

Nevertheless, this growth rate represents a decline of 1.92% points from the preceding quarter, which recorded a growth rate of 2.10%. On a quarter-on-quarter basis, the sector’s growth rate stood at -32.25% in the first quarter of 2024.

Despite these challenges, the agricultural sector remains a vital component of Nigeria’s economy, contributing significantly to employment, food security, and overall economic development.

As the nation navigates through economic fluctuations, policymakers and stakeholders may need to explore strategies to revitalize and strengthen the agricultural sector to ensure its sustained growth and resilience in the face of future uncertainties.

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