“Things fall apart, the centre cannot hold…”
(The
Second Coming, 1919) W.B Yeats .
The present
state of the Nigerian economy is a very worrying state, with oil prices taking
a downward spiral in fact the benchmark has been rubbished, the Organisation of
Petroleum Exporting Countries (OPEC) not cutting output as well as the Central
Bank of Nigeria’s (CBN) Monetary Policy Committee’s decision to devalue the
Naira and the imminent deficit budget.
How did we
end up in this mess?
One central cause
is the decision of the Central Bank of Nigeria (CBN) to devalue the Naira late
last year as part of palliative measures taken by its Monetary Policy Committee
to stabilize the Nigerian economy. As a catalyst, the exchange rate of Naira to
Dollar rose and remains on a high. At the same time, our oil revenue has
dwindled as we have been using our reserves to keep the Naira stable.
While the Central
Bank stepped in last year to send the Naira to its biggest one-day gain in
three years, this ‘intervention’ in the market has reduced foreign reserves to
a four month low of $37.8 billion, so we spent all the reserves trying to save
our economy from an imminent downturn, and we didn’t maximize savings while the
oil price was high.
As if this
is not enough; oil, which is our major and arguably only source of revenue,
started nose diving due to lack of demand. The oil price has dropped by more
than 40%; as at June last year, it was sold for $115 per barrel, but is now
sold for $47 in the main market (Bloomberg.com), and $45 in the black market
(Economist.com).
What caused
this?
Firstly, oil
prices are determined by supply and demand just like any other commodity. They
are affected by changing economic activities as well as by decisions made by the
Organisation of Petroleum Exporting Countries (OPEC). Experts believe that a
growing switch from oil to other fuels, the turmoil in Iraq and Libya (which
are major oil-producing Nations); and more importantly, America which used to
be a major consumer becoming the world’s largest oil producer with more than
20,000 new oil wells since 2010, ten times more than Saudi Arabia’s tally
(Economist.com); has contributed to the drop in oil prices. America’s recent
rise in the oil business has been made possible by “frackling shale formations”,
which is basically a mixture of water, sand and some chemicals injected into
shale formations ‘rocks’ to release oil. It is a relatively
new technology, and is also reportedly being secretly replicated in China and the
Czech Republic.
How does
this affect the common man?
Since the
oil price is low, our external reserves are also low, Naira has been devalued,
exchange rate for dollars is on a high, which means if you earn in Naira and incur
costs in Dollars, then you are in for a very rough time. The Central Bank of
Nigeria has taken several steps in stabilizing the economy, notably through
increasing the percentage of Cash Reserve Ratio (CRR) for the private sector
deposit from 15%-20% and Monetary Policy
Rate (MPR) from 12%-13% . This move is expected to help regulate inflationary
rise. Also certain austerity measures as mentioned by Minister of Finance will
be taken; top on that list is the removal of subsidy. This will ultimately lead
to increase in pump price and so many other ripple effects will follow.
What is the
way forward?
To ensure
the situation does not get any worse than it currently is, the federal
government should judiciously cut its expensive lifestyle and be more prudent
with managing oil revenue. We must take drastic measures to find other means to
internally generate revenue (aside crude oil) and diversify our economy. Encouraging indigenous manufacturers by
implementing suitable laws, we have to stop being an import dependent economy;
we export fuel and import petrol? In some quarters that’s gross foolishness, we
have 4 (four) unused oil refineries, we expend natural gas and leave them
untapped, solving all this issues would be a step in the right direction in this
import eroded economy.
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