Concern mounts as oil price slips to $59

Business

Nigeria’s 2019 budget may face funding issues as oil price slipped toward $59 a barrel last week after new import tariffs imposed by the United States and China came into force.

Finance experts noted that if global oil price drops significantly below $60 per barrel, the Federal government may have problem funding the 2019 budget, which was pegged at $61/barrel.

Oil price took a southward movement mid last week as the U.S began imposing 15% tariffs on a variety of Chinese goods including footwear, smart watches and flat-panel televisions  while China put new duties on U.S crude, the latest escalation in a bruising trade war.

Though U.S. President Donald Trump said the two sides would still meet for talks this month, the actions shook the oil market last week and caused inconvenience to many economies across the world.

Trump, writing on Twitter, said his goal was to reduce U.S. reliance on China, and he again urged American companies to find alternative suppliers outside China.

“Even as President Trump has indicated that scheduled talks between the U.S. and China are still to proceed, the market is more and more resigned to a protracted standoff between the two countries and will be looking towards central bank easing to shore up risk appetite,” an expert at a French banking group, BNP Paribas, Harry Tchilinguirian said.

Beijing’s levy of 5% on U.S. crude marks the first time the fuel had been targeted since the world’s two largest economies started their trade war more than a year ago.

The US-China trade war is raising concerns about a further hit to global economic growth and demand for crude, though China’s commerce ministry said Beijing and Washington had agreed to hold high-level trade talks in early October.

The prolonged trade dispute has been a dampener on oil prices but Brent is still up 12 per cent this year, helped by production cuts led by the Organisation of the Petroleum Exporting Countries and its allies including Russia.

Nonetheless, both OPEC and Russia boosted production in August.

Also putting downward pressure on prices has been mounting evidence of slowing economic growth worldwide, which has prompted analysts to lower forecasts for oil demand growth.

The uncertainty in the international oil market with the resultant fluctuations in the price of oil may weaken the value of Naira, experts have told Daily Trust.

Speaking exclusively to Daily Trust, an economist, Edna Oji, said Nigeria had limited dollar reserves largely due to vicissitudes of the price of oil in the international market.

The expert said this limitation in foreign reserves affects the scope and capacity of the Central Bank of Nigeria to sell dollars and buy Naira for the local currency to appreciate. Oji said though the Nigerian government had deliberately kept interest rates high to attract foreign investments from countries where interest rates are low, the deliberate economic policy may have negative effect on GDP as many companies may not be able to borrow domestically to run their businesses.

She advised the federal government to reduce inflation rate by tightening fiscal, monetary policy and supply-side policies as doing this will increase demand and strengthen the Naira. An Associate Professor of Financial Economics at the University of Abuja, Dr. Mohammed Yelwa, told Daily Trust that the fluctuation in oil price would have adverse effect on the economy, including the possibility of a reduction in the country’s foreign reserves.

Dr. Yelwa said the fall in oil price would also affect the value of the Naira as the CBN may not have enough foreign reserves to defend the value of the Naira. But the Director Corporate Communications, CBN, Mr. Issac Okorafor said “it is natural for the market to move up and down. But we will continue to maintain stability.”

“The currency swap has had a positive impact on the exchange rate in the sense that if we hadn’t put that mechanism in place the quantum of RMB so far sold to those doing business in China would have exerted pressure on the market in the form of higher demand for dollars.

He assured that the CBN would continue to supply the market with forex.

He maintained that indeed the currency swap deal has had an impact.

“If you tally how much you have sold to those who imported goods from China using the RMB and convert it to dollars, all that demand would have been demands in the dollar and that would have had a negative impact. We have saved the naira from that pressure.”

As to what the CBN is doing, he said the CBN would continue to intervene in the forex market. Experts said a significant drop in either the price of crude oil or production will directly have a negative impact on the fiscal position of the country.

It will also cause major macroeconomic instability, particularly in the exchange rate and inflation rate, they added. FSDH Research noted that the crude oil market developments in 2018 and 2019 appear better than in 2017.

Despite these fairly positive developments, they said, the crude oil market is still very volatile. According to the Director General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf,

“There are fears that the sharp fall in oil prices if sustained could lead to a shortage of the US dollars as capital flow reversals intensify, as oil price weakens, and as foreign reserves come under pressure, there are worries that the capacity of the Central Bank of Nigeria [CBN] to sustain the current levels of intervention in the foreign exchange market will be tested.”

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