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We should be worried about declining foreign reserves – Chukwu, business analyst

By Akoma Chinweoke

The reality of a possible crippling budget shortfall stares many oil exporting countries in the face as crude oil, the priced commodity, recently hit its lowest price level in four years.

Oil prices  dropped in the international market from 110 US dollars per barrel to  63 US dollars per barrel. However, some key leaders  recently met on the sidelines of the G20 Summit where Russian President Vladimir Putin, said they were willing to work with OPEC to stabilise the market. A production cut of 1.2 million b/d would tighten the oil market by the third quarter of 2019 and cause prices to rise above $70 per barrel for Brent,” Ann-Louise Hittle, a VP at Wood Mackenzie, energy consultancy group, said in a statement.

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However, Nigeria’s Minister of State for Petroleum Resources, Ibe Kachikwu said it is very difficult for the country to reduce its crude oil production even as  OPEC countries  extend efforts to ward off oil supply glut and prop up prices.

Crude oil prices remained under pressure after oil supply in the U.S. rose before a key OPEC meeting.   Mr. Johnson Chukwu, Managing Director, Cowry Asset Management Limited, in this interview, takes a look at the situation and the way out for the country’s economy. Excerpts:

The recent fall in the price of crude oil in the international market  sent economic and political shocks around the world. The hardest hit have been countries whose economies depend largely on oil for appreciable percentage of their foreign exchange earnings. As an expert,  given that crude oil accounts for about 95 of Nigeria’s foreign exchange receipts. what is the implication of this worrisome trend to the country’s struggling economy?

Like you rightly pointed out, the Nigerian economy is currently facing a lot of challenges. In the second quarter, it grew by 1.5 percent from 1.9 percent recorded in the first quarter of 2018. In the second quarter, Nigeria’s Gross Domestic Product (GDP) grew by 1.50 percent (year-on-year) in real terms to N16.58trillion.

The growth in Q2 2018 was 0.79 percent points higher, when compared to the second quarter of 2017 which recorded a growth of 0.72 percent, but –0.45percent points lower than 1.95percent recorded in the first quarter of 2018.

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Therefore, on a quarter to quarter basis, real GDP growth was 2.94 percent. The National Bureau of Statistics recent report showed that the country’s GDP for the third quarter recorded a growth rate of 1.81 per cent year-on-year. This growth rate of 1.81 per cent represents an increase when compared to the growth rate of 1.5 per cent which the economy recorded in the second quarter of this year.  At that period, oil price was high .

So, we have recently seen an increase in the oil price to the level of  80 dollars per barrel at which period we saw about 4 billion dollars in our reserve which then means that we are witnessing an outflow of capital in our economy, obviously, because of the upcoming general elections.

If the oil price drops further from the current level, then the reserve would be under severe pressure. If we could lose our reserve of close to 4 billion dollars,  and oil price remains in the level of  60 dollars per barrel it has fallen to, then the erosion of oil in our foreign reserve  would become quite high, because the source  of capital inflow that would have moderated the decline  which could have come from foreign portfolio investment, would not likely to come at a time when we are about to face the general elections. Therefore, for the economy, a couple of things would happen if oil price remains at the current level.

These include a  decline in reserve, which would put pressure on the foreign exchange rate and something must give in. We could see a shift in the exchange rate,  and it would have a direct impact on inflation. The inflation rate that dropped from 11.2 percent, may move up again, drastically.  Unfortunately, we are not at a time when the Federal  Government  monetary policy can yield anything on government debt instrument.

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The investors are not likely to drop in Naira renominated asset at a time when there is a risk of further devaluation. You are not going to attract foreign investors that would help you moderate the outflow. If you have a reduction in the reserve, which leads to a depreciation of the Naira, leading to inflation, poor standard of living and for a government that would be facing the electorate in February, that would pose a major challenge.

Then, it is understandable why the government is worried, and business operators also should be worried because, should the reserve decline significantly, it might be difficult for the CBN to meet their demand for foreign exchange. Those who might need foreign exchange to buy raw materials, or bring in their equipment, would find it difficult to source for the fund from the CBN.  And it is going to affect all facets of Nigeria’s economy should oil price remain low.

How, in your view, can the  economy weather the raging storm?

I think the choices we make in terms of how we respond to the drop in crude oil price and possibly  the drop in foreign reserve would determine how we can weather  it. The other time we had issues, the major challenge was that we responded in a panic manner and we took some panic actions that instead of encouraging the investors to bring in the funds, it encouraged them to take them out. For instance, we placed a ban on deposition of cash into domiciliary accounts which could have attracted cash into the system.

There was a lot of restrictions and those restrictions discouraged the flow of capital into the country. We also remained inflexible in our official foreign exchange rate. If you recall, the exchange rate was about N197 per dollar at a point where the parallel market was about N525 per dollar.

So, I think, by now, we have learned from experience  and I want to  believe that the monetary authorities would respond more positively in a way that would adjust one of the key variables i.e. either the exchange rate or the interest rate. But as it stands today, adjusting the interest rate may not have much impact and may not attract foreign portfolio investors.

So, the CBN would likely  have to adjust the exchange rate to allow for autonomous flow of capital into the economy,  and to me, that is very key.  If you cast your mind back  to  when we achieved stability in the Foreign Exchange Market (FX, or currency market) in 2017, the CBN allowed those who have transactions to do, to bring in their funds, at a relatively low market rates and that in fact, redefined  the market.

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So, I foresaw a possible financial crisis. The World Poverty Clock shows Nigeria has overtaken India as the country with the most extreme poor people in the world. India has a population seven times higher than Nigeria’s.

The struggle to lift more citizens out of extreme poverty is an indictment on successive Nigerian governments which have mismanaged the country’s vast oil riches through incompetence and corruption.

So, unless right steps are taken on time by the current government by ensuring that it’s policy options  sustain economic growth  which translates into development, the economy might be heading to the wrong direction in no distant time.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.