The global oil glut has posed both economic and fiscal threats to exporting countries. Specifically, it has left in its trail job losses, currency devaluation, depleted foreign reserves, etc. Nigeria has had her fair share of this. Within this period of plummeting oil price, the country’s currency has had almost a near freefall in value, from about 160 to a dollar to over 200 to a dollar within months. Interestingly, this also coincides with the country’s elections, one that is reputed to have (as much as we pretend it doesn’t exist) an effect of its own on the Naira, due to the rapid demand for dollars for electioneering (whatever that is). As expected, most of the debates on the falling Naira have been influenced by the politics of the moment; so you find people concentrating on the political implications/significance of the devaluation rather than the economics of it. In this article, I shall attempt to look at the falling Naira within a world view, and how other exporting countries have also been affected by steep drop in oil prices.
First, let me state here that it is my desire to see a strong Naira; but it’s also reasonable to tamper that desire with economic realities. It is also noteworthy to mention that while most of the oil exporting countries have been badly bruised by the plummeting oil price, however, some have managed to stay insulated with their large fiscal buffers. The likes of Saudi Arabia, Kuwait, Qatar, UAE fall in the latter category. Whereas Iraq have been crippled by a combined effect of this and war, the likes of Iran and Russia have been amputated further by sanctions, and the likes of Nigeria, Angola, Azerbaijan, etc all have a “bloody nose” from a depleted foreign reserve.
As mentioned above, oil exporting countries with a huge fiscal buffer have been largely insulated from the brutal shock of the sharp fall in oil prices. For example, the trio of Saudi Arabia, Kuwait and United Arab Emirate have over $2 trillion dollars in their Sovereign Wealth Fund (SWF) accounts (apart from other buffers and measures). These countries can comfortably dip their hands in their SWF to fund budget deficits if any and defend their currencies should pressure mount. Their financial ‘war chest’ is so large that it will take a sustained drop in price to get them sweating. They have not only saved for the rainy day, they have also saved for storms and hurricanes. So far, for them, it’s only drizzling while the likes of Nigeria, Angola, Azerbaijan, etc are already drenched in what to them is a heavy rain.
So, how come Nigeria didn’t prepare like these countries? First, I don’t work for government, so it is not in my place to make excuses for them. I will restrict myself to analysing purely from an independent point of view. With the development gaps (infrastructure, etc), the widening recurrent expenditure (something that should be discouraged), and the massive population waiting to be ‘serviced’ through subsidies and the likes, Nigeria does not have the leverage and latitude these countries have. However, the country has the Excess Crude Account (ECA), which over the years has been used as some kind of primary buffer for the rainy day. The thing is, we have rushed to this ECA even when it drizzled; now that it rained, we are left with little cover. Also, the current administration proposed the laudable idea of a SWF, so the country can have a structured saving culture for rainy days like this.
So, what became of these initiatives? Without attempting to exonerate the Federal government from their core functions of managing the economy, to get a holistic view, it is important to look at both the centripetal and centrifugal forces that led to the failure or success of the scheme. It’s important to state here that the SWF actually started, but was fiercely opposed by the Governors Forum; culminating in a law suit challenging the legality. It is also important to remind ourselves the pressure the states put on the federal government to share the ECA intermittently. Thus, over the years, states have been smiling home with shared money from the ECA, along with their regular FAAC allocations. Also, the country’s expensive subsidy scheme is often times funded from the ECA when there is a shortfall. The constant withdrawals from the ECA has put the CBN in a difficult stead in the task of defending the Naira. It is important to state this given the hypocritical stance of some of the beneficiaries who now complain for political gains. That is not to excuse the FGN, as they too benefited from the sharing, and as the manager of the economy – both fiscal (Min. of Finance) and monetary (CBN) – the buck stops with them.
It’s important to look at how other oil exporting countries and their currencies reacted to the plummeting oil price. For lack of space and time, I’ll narrow down to just a few:
Mexico brings on an interesting perspective. The country’s finance Ministry has a sort of sovereign-hedging program that sees them explore purchasing oil options from various investment banks at a predetermined price. Fortunately for Mexico, before the oil glut, they hedged at $76.40 per barrel; an amount which at the time of hedging was lower than the budget bench mark price, but it turned out a life saver in the face of plummeting oil price. That is to say, although the hedging came at an arithmetic cost, it helped save the country of what would have been an inevitable exponential loss in the wake of the freefall in price. It is also important to state here that the hedging only covers a certain percentage and not all of the production capacity, therefore, there is a limit to the magnitude of shock it can absorb. Thus only about 57% was hedged leaving the other 47% of exporting capacity at the mercy of the brutal fluctuation.
Although some analysts argue that oil prices does not directly impact the Mexican Pesa as it should, however, what is not debatable is the role it plays on the foreign reserve. A lower oil price will have a negative effect on foreign reserve. That said, the pesa has been affected thus far. In fact, as early as November last year, the pesa dropped to 13.96 to a dollar, a two-year low. This was largely due to the pressure on commodity dependent currencies in the wake of falling oil price.
Angola, the second largest producing nation in Africa, has also not been spared. Without dwelling much on the impact on the economy in general, the Angolan currency, the Kwanza, has shed over 8% of value in the last 6 months. This is largely because the reserves have been badly depleted as aptly captured by Sureka Asbury and Joe Brock in a report by Reuters:
“As oil prices fell 60 percent between June 2014 and January this year, foreign exchange supplies have dried up, helping to push the kwanza to record lows against the U.S. dollar several times this year” – Reuters, 2nd March 2015
The report further highlights that the Kwanza will likely be devalued a further 20% at some point, noting that it is currently being traded at about 20-40% discount on the black market.
Located within the South Caspian Sea basin, Azerbaijan is one of the oldest oil producing countries of the world. The country shares certain similarities with Nigeria in that oil and gas accounts for about 95% of the country’s export and 70% of the government revenue. The country’s currency, the manat, has lost a lot of value in the wake of the glut. In February, the country’s central bank announced plans to devalue the manat by 33.5%, after they had previously depleted about 8% of their foreign reserve in defence of the Manat last year, and about $1 billion thus far in 2015.
The country’s central bank gave this as the reason: “this decision was made in order to support diversification of Azerbaijan’s economy, strengthen its international compatibility and export potential as well as to provide balance of payments sustainability”.
I don’t want to drag us into the conspiracy theory that attributes the current plummeting oil price to a coordinated effort to cripple Russia; I’ll only focus on the impact. Russia’s case has been quite unique; unique in the sense that theirs was a double blow from the global sanctions and from the plummeting oil price. Fortunately, Russia had a huge reserve to run to. As the biggest producing non-OPEC member country, they’ve saved over the years from the surpluses. With a reserve of about $582 billion, out of which $409 is held in currency reserves and $83 billion in a National Wealth Fund, the kremlin had a handsome fiscal buffer to help soak up the pressure. So far, over $70 billion had been depleted in support of Russian markets and in defence of the ruble (Source: Stratfor). Despite this, the economy was brutally hit. The ruble crashed from about 34 to a dollar in January 2014 to about 73 to a dollar by mid-December. Inflation rose to a 4-year high of 9.1%. By June 2014, interest rate was 7.5%, 6 months later in December, it had risen to 17%.
Other oil exporting countries have also been badly hit. Venezuela, already had an economic crises of their own before the plummeting oil price. Oil accounts for over 95% of the government’s export earnings; so expectedly, they were badly affected. Recent figures put the annual inflation rate at a six year high of 63.4%. Although Venezuela operates a strict currency exchange regime, where dollar is highly restricted from the public, this has catalyzed a parallel market that trades at astronomical rates. The drop in oil price has meant a further scarcity of dollar, thus fueling a rise in rates. As at December 2014, while the dollar exchanged for 6.3 Bolivars at the official rate, at the parallel market, it exchanged for 180 (Source: Council of Foreign Relations).
Kazakhstan is one of those nations who apart from suffering from a risk of their own, also share geopolitical risks of their big neighbour, Russia. With traditional ties between the Kazak’s tenge and the Russian ruble, a fall in value of the latter is a direct threat to the former. Earlier in the year before the oil glut, the country had already devaluated her currency. With about $100 billion in reserves (about $21 billion in cash reserves and $76 billion in the country’s National Fund), the country can fall back on this buffer, but there are talks of a second devaluation in as many years.
It is noteworthy to mention the other oil exporting countries who were themselves worrying over other issues before the plummeting oil price further compounded their crises. For example, Iraq is in the middle of a war, Libya is struggling with post-war reconstruction, Iran is already asphyxiated by Western sanctions, etc. These countries has been at the losing end of the plummeting price.
While there are some opportunities in the wake of plummeting oil price that oil exporting countries can take advantage of (such as reduced subsidy spending, and in fact an opportunity to deregulate completely with minimal effect on the citizenry), let’s see the general incentives or the reasons why some countries actually devalue their currencies at times like this. A failure to devalue your currency at times like this will come at a cost – your reserves might be eroded if you are not careful. Also, a fall in the value of an oil exporting country’s currency could mean increased earnings in the short term, as the sales are in dollars will mean more money when converted to the local currency. Thus, governments exploit this route to balance their budgets in the short term. This route becomes even easier to take, when faced with the stark reality that there is very little that can be done given the depleted foreign reserve that could have been used to defend the local currency.
That said, it is important to point out that countries that are less import dependent will benefit more from this difficult route. In fact, they will even gain more as it will further stimulate local production as foreign goods will be less attractive due to the currency differential. But, can we say the same for Nigeria? No! Actually, we suffer a double measure, because apart from being import-dependent for most basic commodities, we are also pathetically short on refining capacity. We still import a large chunk of refined products; with a devalued currency, this will mean the petroleum marketers will spend more to fund their dollar demands. This was the case a few days ago as Marketers protested the loss they incurred as a result of the currency differential. The Federal Government had to quickly pay them about 30 billion Naira to cushion the loss incurred and avert an impending strike action by the Marketers. To address this sustainably, we will have to do that which we have been running away from – completely deregulate the industry.
On the bright side, the current administration has made serious in-roads in diversification and industrialization. In the midst of this glut, the Nigerian economy, unlike most oil exporting economies, continue to grow remarkably making the top 10 fastest growing economies in the world as ranked by reputable institutions such as World Bank, CNN, Bloomberg, etc. The non-oil sector has continued to experience a steady growth. Inflation has remained fairly stable (at a respectable single digit), despite the sharp fall in oil price and the resultant loss in value of the Naira. Food prices has remained relatively stable because our food import bill has dropped by about half a trillion due to the revolution in the Agriculture sector. The Manufacturing sector is growing rapidly – cars are now being manufactured and assembled locally, Nigeria is now a net exporter of cement, the power sector has been privatized, etc. Imagine how the country would have coped if none of these existed.
That said, this is not a time to relent; it’s a time to build on the gains and make collaborations were necessary. Last month, the Nigerian Petroleum Minister, Mrs Diezani Alison-Madueke in an interview with Economist promised to rally OPEC members to a cut in production to stem the glut – a move that will likely be fiercely resisted by the likes of Saudi Arabia. Until that is achieved, the situation calls for prudence and smart monetary policies that will ensure that ordinary Nigerians are not exposed to extreme shocks. To survive the challenging months ahead, the government must be at their proactive best. Finally, we must be ready to face the brutal truth – Oil Exporting Nations who choose to be gluttonous in time of boom are the ones that are brutally exposed to the doom in time of glut. We must learn to save for the rainy day!