Drop in Price of Crude Oil: Implication on the Nigerian Economy

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DROP IN PRICE OF CRUDE OIL: IMPLICATION ON THE NIGERIAN ECONOMY

PAPER DELIVERED TO BOARD OF DIRECTORS OF GUINNESS NIGERIA PLC

Executive Summary
The volatility in the prices of crude oil in the international oil market which was triggered by factors within the global economy has impacted the Nigeria economy to some degree with dire consequences for the implementation of the 2012 budget. Some of the factors which triggered the fall in oil prices include a massive liquidation of net-long speculative positions, a deepening Euro-zone crisis as well as concerns over a weakening economic outlook, steady rise in global crude stocks, weak US jobs data, and a slowdown in Chinese manufacturing activity. Worries in the economy is that a sustained decline in the prices of crude oil at the international market may hurt the Nigerian economy, particularly the implementation of the 2012 budget based on the earlier assumptions by the federal government. Of the total fiscal revenue projection of N3.463trillion for 2012, the federal government plans to raise 55 percent from oil revenue and the remainder with non-oil revenue. Local and foreign debt (N1.186trn) will finance the federal government’s projected budget deficit of 2.97 percent of GDP. The most pertinent concern is whether the federal government will be able to meet its oil revenue target.

The projections as postulated by FDC are that if oil price declines to $90pb (a 20% probability), revenue will decline 34.7% from $4.6 billion in January 2012 to $3 billion in August[1]. Should this be the case, FDC believed the naira will automatically devalue to N170 in the parallel market; external reserves will deplete to $29 billon by December, while inflation will spike to 15.5% and remain sticky downwards.

The Federal government has put measures in place to hedge against this spiralling trend. Such measures include increasing government funding of the Forex market through the Dutch auction to support the naira, increasing the Cash Reserve Ratio, Growing the Excess Crude Account (ECA) and Raising Foreign Reserve.

At the micro level, Guinness Nigeria Plc ends its financial year in June 2012. Growth has been marginal positive over previous year due to an ambitious growth plan already set in motion and a difficult econo-political environment. The growth plans put in place is expected to sustain the performance and growth of the well into its second quarter of its new financial year. Should the economic instability of the microenvironment persist however, the company should take further measures to hedge itself against the negative impact. Introduction:

The Nigerian economy has come under some level of pressure in the last couple of weeks following a spiraling fall in the price of crude oil, Nigeria’s number one and major revenue earner. Figures released by the Central Bank of Nigeria shows that Nigeria benefited from a high price of crude in 2011 with the price of Bonny Light closing the year (Dec. 2011) at USD 111.46 per barrel. The high price of crude was sustained momentarily during the first quarter (January to March) of 2012 reaching its peak in March at a price of USD 128 (15% above December 2011) before commencing a descent in April 2012.

|Monthly Trend in Price of Bonny | | |Light Crude | | |Date |Value | | |Dec. 2011 |111.46 | | |Jan. 2012 |113.81 |...
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