LAGOS, Mar 23 – After months of denial, authorities here have finally acknowledged that slumping oil income and a depreciating currency have taken a toll on Nigeria in the current global economic meltdown.
The general perception at the end of last year was that Nigeria had been only slightly affected by the world finance crisis. But the contagion effect has become increasingly evident.
President Umaru Yar\’Adua last week signed into law the 2009 budget "with a clear appreciation of the seriousness of the challenges" the nation faces.
Finance Minister Mansur Muhtar said the country had so far managed to weather the storm, "but going forward is going to be (on) a very turbulent turf."
Oil price volatility has been the major source of external shock on the economy of Nigeria, a regional player accounting for 60 percent of west African gross domestic product (GDP) and the world\’s eighth largest oil exporter.
"In general the economy is very vulnerable due to the drying up of liquidity and collapse of oil prices which have put pressure on the currency," said Veronica Kalema, an analyst with the London-based Fitch Ratings.
Crude oil sales account for more than 90 percent of Nigeria\’s income.
"Oil prices have been the biggest shock for Nigeria, followed by the drying up of international capital flows to emerging markets," said Kalema.
Nigeria benchmarked its budget on a 45-dollar-per barrel of crude this year. While oil prices recently plunged well below that figure, they have been climbing slowly and the country still seems to be relatively well-placed to absorb the downturn.
"Nigeria has saved oil windfalls and has better reserves from which it can draw down. That makes it better prepared," said Kalema.
But in telling signs that revenue is running low, the federal government last week dipped into its savings in the excess crude fund, withdrawing 1.5 billion dollars that it had doled out to the states, as it emerged that a third of them had failed to pay some of their February salaries.
World Bank managing director for Africa Ngozi Okonjo-Iweala, herself a Nigerian, said turning to the excess crude account (ECA) is now unavoidable.
"The reason for setting up the ECA was precisely for a rainy day like this, when oil prices fall below the average level (that) one might expect will prevail over time," she said.
"The government is going to have to draw upon the excess crude account this year and very likely next year as well," she added.
Over the past seven months Nigeria\’s foreign exchange reserves have dropped by a fifth to around 48 billion dollars last month from 62 billion dollars when oil prices peaked at 147 dollars a barrel in July year.
Oil output has also not been up to expectations due to unrest in the Niger Delta. The country had expected to produce 2.209 million barrels per day but current average output is 1.78 mbpd.
If production levels remain low, the budget deficit is likely rise above the maximum acceptable three percent of gross domestic product.
The naira has since November lost over 25 percent of its value.
Economic growth is meanwhile expected to slow to between four and five percent due to depressed oil revenue, but is not expected to contract.
Observers say the banking sector is likely to continue to spur domestic growth this year, despite risk from exposure to stock market lending.
Some loans extended by banks to investors to buy stocks and securities have not been repaid.
Nigerian financial analyst Dimeji Odumosu said banks were also finding it difficult to recover loans extended to the petroleum sector because of the crash of crude prices.
Ngozi-Iweala said the banking situation "is relatively solid", adding that to maintain resilience, transparency and confidence would be crucial.
Nigeria "must respond to the challenges it faces transparently and in a way that engenders confidence in the private investor community."