1. Nigeria & not Saudi Arabia is a bigger worry: 5 reasons why Africa’s largest economy is in a mess

Nigeria & not Saudi Arabia is a bigger worry: 5 reasons why Africa’s largest economy is in a mess

Nigerian production cuts have helped boost oil prices to nearly $50 a barrel from under $30 a barrel in Jan

By: | New Delhi | Updated: May 18, 2016 4:36 PM
Nigeria oil rig Nigerian production cuts have helped boost oil prices to nearly a barrel from under a barrel in January.

Just when the world is debating how low oil price is hurting the Saudi Arabian economy, little did analysts figure out that Nigeria, Africa’s largest oil exporter could be in a larger economic mess. A slump in world oil prices has hammered Nigeria’s state income and because crude sales are the government’s main source of revenue the fall has caused crippling shortages of dollars within the economy that have been hurting businesses for months.

The central bank has imposed hard currency curbs and frozen the naira rate to the dollar, which has hit investment as foreign firms expect Nigeria to devalue the currency anyway at some point due to a slump in oil revenues.

Talk of a devaluation of the Nigerian currency Naira has been rife since Vice President Yemi Osinbajo said on Wednesday the central bank needed to change its foreign currency policies to spur investment.

The naira has already weakened due to the spike in demand for dollars from fuel importers. Last week, the US currency fell to 324 naira on the parallel market, whereas the official exchange rate has been held firm just under 200.

A series of pipeline bombings in Nigeria’s oil-producing region this year have led to production cuts that has driven oil output to near a 22-year low and, if the violence escalates into another insurgency in the restive area, it could cripple production in a country facing a growing economic crisis.

The Nigerian production cuts have helped boost oil prices to nearly $50 a barrel from under $30 a barrel in January according to the International Energy Agency.

Here is what is ailing the Nigerian economy

FUEL CRISIS

The growing fleet of tankers stuck off Nigeria unable to unload their cargoes of diesel and petrol is an even-present reminder for President Muhammadu Buhari that another fuel crisis is looming on the horizon.

At least 75 ships with two and a half million tonnes of fuel are waiting for importers in Africa’s biggest economy to find the dollars they need to pay for the cargoes, according to ship tracking data and fuel traders.

Some of the vessels arrived a month ago and their frustrated owners have almost given up hope and started to offer their fuel to buyers outside Nigeria, several traders told Reuters.

PETROL PRICES HIKED

In a bid to break the impasse and head off more fuel shortages, the government raised the price cap for petrol by 67 percent, officially sanctioned importers to use the black market to find the hard currency they need to get cargoes off the ships and allowed any Nigerian company to import fuel.

Announced last week, the reforms were welcomed by some in the oil industry as badly needed steps in the right direction. The changes have largely eliminated the system of heavily subsidised fuel prices, removing one strain on Nigeria’s increasingly stretched finances.

But the so-called parallel market has struggled to cope with the demand for U.S. dollars that followed the reforms.

Nigeria consumes 45 million litres of gasoline a day, or roughly 280,000 barrels, which would require the market to provide some $18 million a day. Though importers cover about 30 percent of this, with the state oil firm covering the rest, it is still a big strain on the market for dollars.

GENERAL STRIKE

Nigeria has four refineries but decades of neglect mean it has to import most of its fuel, which was less of a problem when crude was at $115 a barrel and the OPEC member was the leading oil exporter in Africa ahead of Angola.

As well as the slump in crude prices, which touched a 2016 low of $27 in January and were below $48 last week. Nigeria’s production dropped this month to 1.65 million barrels per day from 2.2 million and risks slumping to its lowest since 1970.

In a effort to address the looming fuel shortages, the Nigerian National Petroleum Corporation (NNPC) has begun talks with at least three international firms to swap more of its crude for gasoline, according to traders and oil executives.

But the drop in output due to the unrest in the Delta – as well as the fact oil firms take more physical cargoes as payment for services when prices are low – means the NNPC has less crude to swap for fuel.

Signs of trouble ahead are growing. On Saturday, Nigeria’s two main labour unions called for an indefinite general strike from Wednesday unless the government reverses its plan to increase the price of petrol, which many rely on for power generation as well as transport.

Raising fuel prices is sensitive because many Nigerians see the state subsidy as the only benefit they derive from living in a major oil producing country which is nevertheless gripped by endemic corruption and poverty.

The West African country tried to end fuel subsidies in 2012, doubling the price of gasoline overnight, but later reinstated some of the subsidy to end a wave of protests.

The only long-term solution for Nigeria is to build its own refineries and fix the infrastructure, according to Chinedu Ukadike, chief of staff to the national president of the Independent Petroleum Marketers Association of Nigeria (IPMAN).

NEW INSURGENCY IN OIL PRODUCING DELTA

They call themselves the Niger Delta Avengers. Little is known about the new radical group that has claimed a series of pipeline bombings in Nigeria’s oil-producing region this year and evaded gunboats and soldiers trawling swamps and villages.

President Muhammadu Buhari has said he will crush the militants, but a wide-scale conflict could stretch security forces already battling a northern rebellion by hardline Sunni Muslim group Boko Haram.

Militancy has been rife over the past decade in the Delta, a southern region which is one of the country’s poorest areas despite generating 70 percent of state income.

Violence has increased sharply this year – most of it claimed by the “Avengers” – after Buhari scaled back an amnesty deal with rebel groups, which had ended a 2004-2009 insurgency.

Under the deal, more state cash was channelled to the region for job training and militant groups were handed contracts to protect the pipelines they once bombed. But Buhari cut the budget allocated to the plan by about 70 percent and cancelled the contracts, citing corruption and mismanagement of funds.

The “Avengers” have carried out a string of attacks since February that reduced Nigerian oil output by at least 300,000 barrels a day of output, and shut down two refineries and a major export terminal.

DEVALUE NAIRA

Nigeria’s central bank denied a report that it planned to devalue the naira, while the International Monetary Fund (IMF) reiterated that Nigeria would benefit from a more flexible exchange rate but said no request for funds had been made.

Talk of a devaluation has been rife since Vice President Yemi Osinbajo said on Wednesday the central bank needed to change its foreign currency policies to spur investment.

News website SaharaReporters.com said President Muhammad Buhari had agreed to devalue the naira in exchange for IMF funds to help offset a slump in oil revenues.

Quoting unnamed Buhari aides, the report said the naira rate to the dollar could fall to 290 from roughly 200.

The central bank has imposed hard currency curbs and frozen the naira rate to the dollar, which has hit investment as foreign firms expect Nigeria to devalue the currency anyway at some point due to a slump in oil revenues.

“Exchange restrictions are costly and distortionary; at best, they could be temporary, but should be removed,” the IMF spokesperson said in an emailed in response to questions.

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