By Lanre Fashina
Nigeria is not in recession. At least not yet. Not officially. Nevertheless, an aura of impeding economic emergency looms palpably over the country. From the coastlines of Lagos in the South to the arid deserts of the Northern enclaves, pulses have been on edge in recent days with different financial and economic experts offering both positive and negative prognosis for Nigeria’s economic fortunes. Which way will the coin fall?
A country is officially in economic recession when it experiences two successive quarters of negative economic growth. Although Nigeria’s economy recorded negative index during the first quarter of 2016, we still have till the end of June to maneuver the economic ship towards safe habours that will spare the government’s blushes associated with falling into a successive second negative index in the current quarter which will confer official status of recession on the nation. Nigeria’s economy already contracted about 0.4% in the first quarter (Q1). Q1 being the first three months of the year i.e. from January to March. There is a pertinent question at this juncture. How did we arrive here?
How We Got Here
The backgrounds responsible for the current economic challenges we face as a country are influenced by interplay of strategic factors. These include uncertainties in articulation of long-term governmental policies that will secure investor confidence; delayed budget passage; the dicey implications of being sustained largely on a mono-cultural economy; costly security challenges and upheavals in the North East and more recently in the Niger-Delta; stringent restrictions on Forex policies; and continued fall in global oil prices which places oil-dependent mono-economies like Nigeria at significant disadvantages. In a country where crude oil contributes over 90% of foreign exchange earnings, the scenario of continued downslides in global oil prices is naturally one of dire situation requiring strong financial prudence and economic ingenuity to survive.
The ability of a nation to thrive favorably in the global market dynamics depends on the strength of its Gross Domestic Products (GDP) and the balance between its exports and import trade indices. Nigeria is a net importing country. Our imports include food items, refined petroleum products, vehicles, machinery, pharmaceuticals, electronics, wears, services and technical expertise (e.g., for construction work) among others. Over the years, Nigeria has continued its drift away from a previous model of expanded economic base that earned major foreign exchange through export of agricultural products into a less dynamic mono-economy driven by oil. The ill-managed oil booms of early years created a costly impression of ‘easy money’ with abandonment of agriculture and neglect of indigenous technological development for patronage of foreign products ‘easily imported’ from abroad with petrodollars.
Soberly, the financial muscle to sustain this new paradigm of imported products and services from the global market is driven almost exclusively by Forex earnings from crude oil sales to the outside which is subject to volatility of international dynamics. The unanticipated and humongous downslides in crude oil pricing on the global scene has left Nigerian economy in straits with limited options of maneuvers. The oil price crashes consequently led to significant scarcity of the Dollar in Nigeria and astronomical hikes in its exchange rates to the Naira in the financial market. The multiplier effects of these are constraints on our economic activities including the inability to import materials needed for certain productions and hence a depression in the manufacturing sector.
The Global Picture
Strategic reasons are responsible for the continued low pricing of crude oil in world market. Economic forces of demand and supply dictate the price of oil on the international stage. Prices are driven up when demand outstrips supply. Conversely, prices slide when supply is in excess of consumer demands. The latter scenario was playing out in recent times and has been the cardinal cause of slumps in international crude oil price value.
For oil-exporting countries, exchange rates of the local currency to the dollar appreciates in favour of the former during demand booms for crude oil but plummets during periods of oil price crashes. This has been having implications for Nigeria’s economy when crude oil prices proceeded on a path of downward spiral from June 2014 after a previous high of 115 USD per barrel. The sustained fall in sales reached a record low at 27 USD per barrel in January of 2016.
Key markets for Nigeria’s crude include Asia, Brazil, Europe and the United States. Initially, significant economic activity levels in China, India and Brazil due to rapid growth and expansions in the recent past drove up oil energy demands beyond regular supply leading to skyrocketing prices in crude oil sales. By 2014, the expansion momentum reduced considerably and the same countries that were previously driving up oil prices through their high demands helped to bring down same by demanding less of the product such that supply now outstrips demand. Crashes in prices follow as the natural consequence.
The United States also began to import much less of Nigerian crude oil as a result of its increased self-sustenance due to novel technology, frackling, which enables it to extract oil from erstwhile unavailable shale in Texas and North Dakota. By virtue of this development, it has become the world’s largest producer of oil and less reliant on import of the commodity. Strategically, this has significant ramifications for Nigeria as it translates into key loss of a big consumer for the Nigerian upstream industry with accompanying economic deficits in terms of available dollars and international purchasing power required to sustain a net importation country.
(To be continued in a sequel)
DISCLAIMER: Views expressed in this article are exclusively the author’s, and do not necessarily reflect the editorial policy of Zenera Consulting.