Nigeria less prepared to tackle oil shock – IEA

2020-03-19
THE PUNCH Newspaper- Femi Asu

The Nigeria is less prepared to deal with an oil price shock than it was five years ago, the International Energy Agency has said.

The country slipped into recession in 2016 on the back of the steep fall in global oil prices that started in mid-2014 and the resurgence of militant attacks on oil facilities in the Niger Delta that caused production to tumble.

The IEA said in a new report that the energy market turmoil had deepened challenges for many major oil and gas exporters.

According to the agency, the global oil and gas markets are facing an unprecedented situation: demand is collapsing because of the impact of the coronavirus while supply, already overabundant, is significantly increasing.

It said, “In some countries, large-scale production and exports of oil and gas provide vital income to finance their national budgets, which means volatility in global energy markets can translate almost instantly into macroeconomic pressure.

“When prices fall, these ‘producer economies’ have often responded by trimming their spending, cutting salaries for public sector employees, and axing or delaying large capital projects. These measures have previously contributed to slower economic growth – or even contraction.”

The IEA noted that the plunge in the oil price during 2014 and 2015 was a wake-up call for many producer governments, saying it underlined the need for change but simultaneously undercut the means of supporting it, as many public budgets were reduced sharply.

It said, “Today, we are witnessing another shock, this time from both the demand side (the coronavirus impact) and a surge in supply. In many producer economies, public finances are in worse shape today than they were five years ago, leaving them even less able to absorb the shock. And the coronavirus is set to provide a huge test for the countries’ social and health infrastructure

“The results are startling. Under these assumptions, oil and gas income for some key producers would fall between 50 per cent and 85 per cent in 2020, compared with 2019. This would represent these producers’ lowest income in over two decades.”

The IEA said the impact of the drop in income would be felt across the board, adding that producer economies had not fully recovered from the previous price collapse in 2014.

“For example, per capita GDP in Nigeria in 2018 was one-third lower than it was in 2014, meaning that in many ways, Nigeria is less prepared to deal with a price shock than it was five years ago,” it added.

According to the report, lower oil prices are expected to put severe fiscal strain on a number of important producers.

It said, “As well as the likely widening of fiscal deficits, the countries’ decreased export revenues will impact their overall trade balances, leading to downward pressure on their currencies.

“For a number of producers that have exchange rates pegged to other currencies, this would require a drawdown of crucial foreign exchange reserves to maintain currency stability.”

 

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