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Nengi Phil-Ebosie: Covid19, Oil Price Crash & the Effect on Nigerians

Businesses/traders in Nigeria are beginning to feel the impact of the lock-down in Wuhan, China as they have been unable to import and restock, with the old stock slowly running out. Nigeria is highly ‘import-dependent’ on China – our imports from China was US$8.35 Billion in 2018, according to the United Nations Comtrade database on international trade.

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“When it rains, it pours” – Author unknown

This quote pretty much describes the current situation of Nigeria. Just 3 months into the year 2020 and the global economy has been thrown into pandemonium.

The Coronavirus (Covid-19) outbreak has disrupted the world economy, especially travel and tourism. China has been particularly hit as factories in the busy city of Wuhan has been on lock-down for weeks to curtail the virus. The spiral effect has recently pushed down oil prices. Why?

According to a CNBC report, China accounts for one-third of global manufacturing and is considered the world’s largest exporter of goods. China is the main new consumer of oil in the world as it accounts for about a third of new consumption of oil each year. However, due to the Coronavirus outbreak, there’s little or no demand by China, the supply of crude oil has outweighed demand and this has forced oil prices to sink.

In the past, when there has been a disparity between supply and demand of oil, oil-producing countries would agree to reduce the supply to shore up prices.

However, this has not been the case as the oil price had its worst day in 11 years on Monday the 9th of March, 2020. Saudi Arabia, a member of the OPEC and Russia (Non-OPEC member) had a fallout over the Coronavirus crisis and this has affected the demand for crude oil. Saudi Arabia shocked the market by launching a price war against Russia.

The Brent Crude, the global benchmark, dropped by 26% to $33.49 a barrel on the 9th of March, 2020. An amount below the Nigerian Federal Government revenue budget of $57/barrel for 2020.

Impact On The Nigerian Economy

According to Bloomberg, “The combination of a current-account deficit (previously due to strong imports but now being compounded by weak exports), portfolio outflows and lower oil prices will continue to deplete Foreign Exchange (FX) reserves and pressure the Naira”.

• Tumbling oil prices will result in a drastic reduction in the revenue of the government.
• Budget implementation will be constrained (infrastructure financing will be affected, government borrowing may increase, and the capacity to fund capital project will be severely constricted)
• The weakening of investors’ confidence may result in the capital flight of Foreign Portfolio Investment (FPI)
• Speculative pressures on the currency may likely lead to depreciation of the Naira exchange rate.
• Sharp inflationary pressures on the back of a weakening currency
• Possible increase in production and operating costs for businesses
• Fear of possible currency devaluation in 2020.
• Government may increase borrowing.

Impact On The People

• Possible increase in inflation, thereby reducing disposable income.
• Possible devaluation as a result of weakening currency, reducing purchasing power.
• Government may come up with more ways to tax citizens to reduce the budget deficit due to the sudden drop in oil price.

Businesses/traders in Nigeria are beginning to feel the impact of the lock-down in Wuhan, China as they have been unable to import and restock, with the old stock slowly running out.

Nigeria is highly ‘import-dependent’ on China – our imports from China was US$8.35 Billion in 2018, according to the United Nations Comtrade database on international trade.

So people, buckle up, it’s about to get bumpy if:
• The price war between Saudi Arabia and the Russian government continues.
• The lock-down in China lingers.

Trouble loves company but we hope and pray it doesn’t have that company in Nigeria.

Nengi is a finance specialist with several years of experience, A Foodie & Super GAME OF THRONES addict. A mother, wife and believer of God. MOTTO: No knowledge is lost

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