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Analysts Foresee Faster Economic Recovery for Nigeria as Oil Price Hits $60

February 9, 2021
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Oil Prices Fall on Renewed Coronavirus Concerns as China Cases Mount
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Analysts on Monday predicted a faster economic recovery for Nigeria as crude oil prices, at $60 per barrel, hit a new high since February 2020.

The analysts, however, urged the federal government to be prudent in the utilisation of the extra revenue that may accrue to its purse.

They also cautioned that while the price appreciation could help in meeting and surpassing the $40 per barrel benchmark in the 2021 budget, thereby helping to fund the fiscal deficit, higher fuel price may increase inflation rate which is already at 15.75 per cent as at December.

The analysts, in separate interviews with THISDAY, also advised the federal government to take advantage of the higher prices to boost capital spending as the country cannot guarantee that the price will remain high for a longer period.

The global benchmark crude, Brent rose yesterday, hitting $60.04 a barrel, a development that was last experienced by the global oil market on February 20, 2020.

Also, the United States West Texas Intermediate crude futures advanced 59 cents or one per cent, to $57.44 a barrel, the highest since January last year.

However, the rise in Brent price could mean bad news for many Nigerians who buy petrol from the pumps, with a likely inevitable increase in the retail price across the country.

In response to the new crude oil price, the pump price of petrol rose marginally in many filling stations in Lagos, the nation’s commercial capital, from N159 per litre to N162.

Monday’s crude oil price increase was boosted by supply cuts among key producers and hopes for further United States economic stimulus measures to boost demand, according to Reuters.

Saudi Arabia’s pledge of extra supply cuts in February and March on the back of reductions by other members of the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, is helping to balance global markets and support prices.

Reacting to the oil price rise, the Chief Executive Officer/Managing Director, Eczellon Capital, Diekola Onaolapo said: “Essentially, it is more revenue for the country hoping the volume of production doesn’t get hampered. Overall receipts from crude sale are price multiplied by volume. So, if price is going up and all things being equal volume remains the same, it would mean more revenue for the country. Budget performance and the deficit financing becomes easier.”

However, he said the rise in oil prices may lead to an increase in petrol prices and could also impact inflation and Nigerians’ living standards.

An economist and Associate Professor at the Lagos Business School, Dr. Bongo Adi, said the development could translate to full implementation of the budget and upward trend in the price of Brent crude price would be sustained in the medium term.

Adi said: “The increase in Brent price is massive leverage to the budget which is going to reduce the fiscal burden and deficit. It means that government can now meet its budgetary target.

“Nigerians should ideally look forward to full budget implementation and there ideally shouldn’t be any excuses for the inability to meet budgetary provisions.

“Demand for oil would keep going up and we would see oil in the highs. It would not be a surprise if oil hits $100 per barrel or more in the years to come.”

Also, the Head of Research, United Capital, Mr. Wale Olusi, said: “The implications of the upwards trends in Brent makes everything brighter for the budget because if you are projecting $40 per barrel, and you have estimated your revenue based on that, it simply means you have a lot of surpluses.

“Government can now rake in more revenue and more revenue can go into the excess crude account as well as the external reserves. So apart from the budget, it also makes Nigeria look good to foreign portfolio investors who I think the central bank is trying to attract currently.

“It is fantastic news and if the pricing sustains, the impact on reserves would continue to improve over time because the reserves have cruised on a daily basis.”

Speaking on the development, President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said while the oil price increase is a welcome development considering that the 2021 budget is based on $40 per barrel, the government should apply the excess oil revenue prudently.

According to him, the new crude oil price provides a good opportunity to build fiscal buffers, increase the excess crude account and possibly invest some in the infrastructure component of the Sovereign Wealth Fund (SWF).

“The government may also consider seizing this opportunity to cut down the budget deficit.

“It will also help external reserves accretion and put the CBN in a stronger position to defend the value of the naira.

“The knock-on effect should be positive for the economy because I see a stable exchange rate moderating inflationary pressure and further boosting the stock market. So, economic recovery effort is made easier,” he added.

Also, an economist and Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, stated that the increase could trigger a rise in pump price of petroleum products, especially diesel and kerosene.

“This is so because subsidy does not exist anymore,” he added.

He said though the increase in oil price will further improve the country’s trade balance and balance of payment, “higher fuel price may increase the inflation rate already looking high.

“So, while the country celebrates the high price, the populace or ordinary citizens bear the negative impacts.”

He, however, explained that higher oil price will reduce the budget deficit figure as well as cut borrowing projections and improve the value of the naira.

On his part, the Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, told THISDAY that it would amount to a travesty if the extra funds are not used judiciously by the government, especially as the country is facing some fiscal challenges.

He said given that the trickle-down effect of higher oil prices tends to boost GDP growth, potentially, the country may feel the positive impacts if the government funds key areas to stimulate the economy.

He said the federal government should also consider increasing funding to SWF so as to hedge against possible downturns in oil prices in the future.

Obinna Chima, Nume Ekeghe in Lagos, Emmanuel Addeh and James Emejo in Abuja

Tags: Economic RecoveryNigeriaOil Price
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