OrderPaperToday-The last time Nigeria slipped into recession, it was as a result of a slump in the price of crude oil in the international market, now the price of crude is hovering around $30 per barrel from over $60 per barrel.
At the root of this slump is the outbreak of COVID19, with death toll already causing global panic. The implication on the world economy even when the virus was still restricted to China and few Asian countries was tremendous, now with its global status economy, the world economy is contending with mass hysteria.
In fact, the global outlook as contained in the 2020 budget did not envisage the Coronavirus affecting the global economy, as the outlook reads, “Growth in China is expected to moderate while India’s growth is projected to surge. However, there is tepid recovery in other EMDES like Nigeria and Brazil.”
According to the approved budget for the 2020 fiscal year, 43.86% of the projected revenue is expected from oil related sources. Indeed, a reason to be worried. One cannot fault the government for this, after all, the budget had already been passed before the World Health Organisation (WHO) heard the first report on the 31st of December, 2019.
The Nigeria economy is not immune to the impact of the coronavirus. Aside the potential impact on the general economy, every single parameter of the 2020 budget is going to be affected by the coronavirus. The oil benchmark set at $57 per barrel, exchange rate of N305 to $1 and daily production of 2.18million barrel production per day.
Oil contribution to 2020 budget
Despite all the talks about diversification, out of the N10.59 trillion budget for 2020, the aggregate revenue projected is N8.1 trillion, of which N2.64 trillion is expected from oil. This revenue projection is only feasible if oil sells above $57 per barrel and Nigeria is able to maintain production at 2.1 million barrel per day.
Two things are already threatening these projections. First is the Coronavirus as stated earlier, then the oil price war between Russia and Saudi Arabia. As at the time of writing this piece, the price of oil in the international market is $30 per barrel.
Already, both chambers of the National Assembly have set up special committees to deliberate and fashion out ways to cushion the effect of the pandemic on the Appropriation Act, with proposals to amend the budget coming under careful consideration. On the other hand, the presidency has also put a team out to address the same issue and what is sure is that drastic measures and adjustments will be made at the end of the day to accommodate emerging realities.
In response to the crash in global oil prices, the executive, through its minister of state for Petroleum, Timipre Sylva, announced a cut in the pump prices of petrol on Wednesday. This review in prices, he stated, will be done periodically to reflect drops or increases in the global oil market.
How is Coronavirus affecting price of oil?
Oil, like most commodities, is governed by the law of demand and supply, simply referred to as the invisible hand. The price of crude oil is determined by the quantity available in the market and the demand for it.
The coronavirus has significantly affected some of the most important regions in terms for demand for oil: Southeast Asia and the European Union. The virus which broke out in Wuhan, China, has made the Chinese government to take certain drastic measures to combat its spread by shutting down movements, which in turn affected manufacturing, service sector and tourism, which in turn reduced demand for oil and the price automatically nosedived.
Other manufacturing giants in Southeast Asia are affected. Countries such as Japan and South Korea are struggling with the effects of Covid-19. Over the past couple of weeks, European countries have also seen a spike in the pandemic. From Italy to France and Spain, the responses have been draconian, including shutting down of their borders which has impacted negatively on businesses and the demand for more fuel.
Saudi Arabia vs Russia in oil price war
On Wednesday, 11th of March, Saudi Arabia raised the stakes in its oil market battle with Russia, saying it would increase its production capacity to a record 13 million barrels a day.
The announcement came less than a day after the kingdom said it would increase oil output to an unprecedented 12.3 million barrels a day. This is quite significant for Nigeria and other OPEC members and the reason is simple, oil producers can only influence the price of crude oil in the international market by controlling supply. It is a difficult job considering the fact that not all producing nations are members of OPEC. Some of the largest producers of oil such as Russia, United States, Norway, Brazil are not members of OPEC and to increase the price of oil in 2018, Russia joined OPEC (not as a member) to agree to 1.5 million supply cut.
However, on the 5th of March this year, during an informal meeting between OPEC and other non-members like Russia and Kazakhstan, the group could not agree on a 1.5 million cut, as reports from the meeting showed that the Russia was in particular not willing to commit to such cut.
This could explain the move by Saudi Arabia to increase production which will crash price but will hurt the Russian economy, perhaps force them back to the table.
While this move would yield some fruit in the nearest future, for Nigeria, every distance from $57 per barrel is a possibility of not being able to finance a budget that is already over N2 trillion in deficit. It is unclear if Nigeria will be able to sustain the budget till June, 2020 when OPEC will meet next.