Oil crash: Nigeria risks social instability — Analysts

BY MICHAEL EBOH

Analysts have warned that the low price of crude oil in the international market might lead to fiscal crisis in Nigeria, which if not addressed urgently, would constitute a major threat to social stability in Nigeria.

Afrinvest in its Report titled, ‘Nigerian Economy and Financial Market: 2015 Review and 2016 Outlook,’ disclosed that “the impact of lower crude oil price is likely to keep domestic output growth at a sub-optimal level. (This is) as consumption expenditure which contributed 74 per cent to Gross Domestic Product, GDP, in the second quarter of 2015 stays soft, while private sector investment, which is 17 per cent of GDP may be constrained by currency market challenges and the higher risk environment.”

The Report further stated that Nigeria’s response to the low crude oil price environment had served to worsen the cloud of investors’ uncertainty; a situation which it said led to the rout in the country’s financial system.

It said: ‘The country is currently experiencing the sharpest drop in government revenue in the wake of abruptly lower oil prices which has impeded the fundamental structure of the ‘sharing’ economy.

“Closely related to this was the massive bailout handed by the Federal Government to sub-national governments who could not pay salaries for an average of six months due to lower federal allocations and poor capacity to generate internal revenues.”

In addition, the Report also argued that the lower oil price regime would put pressure on the Naira and trigger devaluation in the nation’s currency. To this end, it projected a minimum of 25 per cent adjustment of the Naira by the CBN before the end of the first half of the year, to about N265 to the dollar.

It added: “With unrelenting downward pressure on crude oil prices and the continuous strengthening of the dollar, we opine that the pressure on the naira may likely continue unabated. We believe that the current stance of the apex bank on the foreign exchange rate is unsustainable in the wake of the higher interest rate environment in the United States, weaker global outlook on oil prices and reduced accretion to the reserves.”

Also commenting, the Chief Economist, PwC Nigeria, Mr. Andrew Nevin, warned that growth headwinds will persist in Nigeria as low oil prices present fiscal and current account challenges.

He, however, noted that with government’s support and improved tax collection, non-oil revenues could see significant increases, keeping Nigeria’s deficit to around 2.5 per cent of GDP.

Continuing, he said: “Growth will rebound after a disappointing 2015 to almost five per cent in 2016 as tight fuel supplies and power outages abate and a more accommodative monetary and fiscal stance takes hold. A crackdown on corruption should also help to increase FDI inflows, supported by improved security and better governance