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Oil slump, coronavirus create a perfect storm for Nigeria’s economy

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Dwindling oil prices: Nigeria risks production shutdown, fiscal crisis — Experts•As economic pain ripples to the developing world, Nigeria’s dependence on oil puts its economy under severe threat

By Joe Parkinson & Benoit Faucon

The crash in oil prices and the economic fallout from the coronavirus together pose what could be an existential threat for Africa’s largest economy and biggest crude producer.

Nigeria, a country of 200 million people, is slashing production faster than any other major oil economy following the precipitous plunge in global prices. Cargo ships full of millions of barrels of Nigerian crude have nowhere to go, with much of the world on lockdown. Nigerian oil companies are desperately competing to ûll the last few empty tankers still left at sea.

The result is a twin shock for an economy that has become a symbol of how virus-induced economic pain is now cascading from wealthy nations to the developing world.

“When there’s no more vessels to load the crude, then the entire world collapses,” said Kola Karim, chairman of Shoreline, Nigeria’s third-largest oil producer. “You will have serious, serious security implications. Unrest.”

Across the global south, the sequencing of the virus has been inverted, with countries in Africa, South Asia and Latin America suûering an economic crisis before an exponential rise in virus cases. Dozens of developing nations are now forecast to suûer their greatest economic declines on record despite having relatively few conûrmed coronavirus cases.

In Nigeria, where oil accounts for 60% of government revenue and 90% of foreign exchange, the government has already slashed its 2020 budget by $5 billion and approached the International Monetary Fund for $7 billion in emergency funding. Nigeria’s break-even oil price is $133, the highest in the world due to high reûning costs and government corruption, according to Fitch Ratings. Now, with prices for several oil benchmarks having fallen below zero, Nigeria is generating losses for every barrel it produces.

At least seven vessels carrying 12 million barrels of unsold Nigerian oil—seven days of production—are currently stranded at sea, according to data-analytics company Vortexa. The tankers come from production from ûelds run by Royal Dutch Shell PLC and Exxon Mobil Corp.

In one case, a tanker was redirected away from the U.S. Gulf Coast. It headed to the Canary Islands, where other Nigerian-hired ships are idled, the data showed.

But stopping the pumps is also risky, industry experts say, because some wells are too old to be restarted once they go idle. Once it runs out of ships willing to collect its crude, it may be forced to permanently close the taps on decades-old wells that were meant to lift the country up from poverty.

“Nigeria is a drug addict about to go cold turkey,” said Matthew Page, a former state department oûcial in Nigeria now at London-based think tank Chatham House. “Its governmental structures, predicated on dividing up the national cake of petroleum revenues, are now unsustainable.”

While producers all over the world are hit by the oil rout, Nigeria is an outlier in the global oil market: an oil-dependent economy with the production costs of an industrialized nation.

Oil Minister Timipre Sylva said in an interview that Nigeria is cutting output by 23% this month and some streams have shut down as they are no longer economically viable. “We are not comfortable. But I believe we are at the rough bottom,” he said. “We can only go up.”

A country of more than 500 languages with deep regional and religious divisions, some Nigerian commentators have long warned that oil is the glue that holds the fractious society together.

More than 90% of Nigeria’s 206 million population work in the informal sector, meaning the government’s lockdown of major cities risks depriving tens of millions of people of the cash they need to survive. The number of people conûrmed to have died from the coronavirus is low but the pandemic has already penetrated the highest political oûce, killing the president’s chief of staû, one of the country’s most powerful men. The disease is also now seeping into the northeast, infecting aid workers on the front lines of the conûict with jihadist groups.

The true scale of the virus in the country is unknown: In the state of Kano, home to 10 million people, authorities on Thursday said they were investigating a “mysterious” sharp rise in deaths, while testing for the virus has been suspended because of a lack of kits. “We are becoming overwhelmed,” Bashir Mohammed, one of the undertakers at Kano’s Dandolo Cemetery, told the Daily Trust newspaper. “The way people are dying is not ordinary.”

Nigeria has weathered a series of oil shocks in the past and has in recent years sought with limited success to reduce its dependence on crude. But the International Energy Agency has warned Nigeria is considerably less prepared to tackle this slump as gross domestic product has shrunk by almost a third in ûve years. The economy had been projected to grow 2.5% this year, slower than its population, until the coronavirus tipped it into a likely recession.

“Some people are trying to pretend this will blow over, but it is diûerent to every other shock we’ve faced,” said Dolapo Oni, an industry analyst from Lagos at Richardson GMP, a Canadian wealth-management ûrm. “Demand for oil, and demand in the broader economy has disappeared.”

Mohammed Garba, manager of the Matrix gas station in the northeastern city of Maiduguri, said his business will fail without a government bailout. “I don’t think any ûlling station can survive this…The government will have to come to our rescue or I see dark days ahead.” Without income, some residents of the villages outside have resorted to stopping rice trucks and seizing their bags.

Nigeria, Africa’s most populous country, has 1,273 conûrmed coronavirus cases and a conûrmed national death toll of 40, far fewer than in the U.S., Europe and Asia. The World Health Organization has warned that the continent could be the next epicenter of the outbreak. The number of conûrmed infections in Africa jumped 43% last week to 26,000, according to data from the Africa Centers for Disease Control and Prevention. United Nations oûcials have said it is likely the pandemic will kill at least 300,000 people in Africa and push nearly 30 million into poverty.

Nigerian Finance Minister Zainab Ahmed has warned the economy is in “crisis” and needs “drastic action.”

The most daunting challenge may be to prevent a further deterioration in Nigeria’s security. Western security oûcials warn that budget cuts and the need to police the coronavirus response will further weaken an overstretched military in its ûght against jihadist groups that have been gaining momentum.

In recent months, militants from Islamic State’s West Africa franchise have launched several attacks and on a single day last month militants killed more than 100 Chadian and Nigerian soldiers. With Nigeria’s army withdrawing from the smaller countryside outposts, the jihadists have started to build nascent state structures including tax collection, agriculture subsidies and their own brand of Shariah justice.

“Nigeria has never seen anything like this before,” said Bulama Bukarti, a human-rights lawyer and conûict development analyst. “There is a multiplier eûect to all these crises; pandemic, oil shock, an existing conûict and a humanitarian crisis.”

In a twist of fate, President Muhammadu Buhari, re-elected to a second term last year, was leader of the military government in 1985 that presided over that crisis, which resulted in him being pushed from power. Now, Mr. Buhari will be forced to face this economic shock without his chief of staû and so-called “economic brain,” Abba Kyari, who died earlier this month after contracting Covid-19.

On Thursday, Nigeria widened the lockdown of its two major cities to include a ban on interstate travel. In the sprawling slums of Lagos, where half of the city’s 21 million people rely on daily earnings to survive, there is a fear that the economic consequences of the restrictions are more deadly than the virus. Almost 200 people have been arrested after a string of poorer districts reported a rise in looting and gang attacks. “I don’t know how my family will survive if the lockdown continues,” said Umar Usman, who pushes a cart to transport market goods. “I’m running out of food.”

Culled from The  Wall Street Journal

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