The relentless defence of the naira since the collapse of oil prices last year has forced the Central Bank of Nigeria to spend a chunk of its foreign reserves. The dollar account has now been depleted to its lowest point since 2006, hitting $29.9 billion after the latest withdrawal this week.
During this dire economic period, which saw the devaluation of the naira, Nigeria has spent an average of $200 million daily to protect its legal tender. It has also taken up unorthodox tactics to ensure the economy is not dollarized, including a threat to schools and local traders demanding payments in the foreign currency.
Such unconventional actions are however validated. Reduced oil revenues have ensured a shortfall in dollars accruable to the CBN coffers. Also, below the $30 billion threshold, in which Nigeria now finds itself, the country can only sustain about four months of import cover as against the internationally accepted six months. This could trigger a phone call from either the IMF or the World Bank, which will both be keen on offering financial assistance. But this may only return Nigeria to the gloomy days of indebtedness.
Nigeria remains reluctant to thread this path, despite immense pressure to find alternative sources to pay its bills. The agriculture initiative, a project close to the heart of its President, Dr Goodluck Jonathan, has yielded significant dividends over the past five years as the country seeks a quick fix to economic diversity. But even the greatly lauded agri-transformation still contributes less than 10 percent of the government revenue, leaving its unattractive oil as its cash cow.
Still, oil prices are not expected to climb anytime soon. In fact, analysts have predicted that it will likely stabilise somewhere between $50 to $60 in 2015. Should predictions turn to reality, Nigeria, Africa’s biggest oil producer, will be losing $137 billion this year when measured against oil’s peak price of $115 in June 2014.
The recent budget revisions, however, suggests the country is determined to avoid the looming call. It has twice revised oil benchmark downwards to $52 in a bid to incorporate the current realities. Capital spending has also been slashed to just 8 percent of the budget, the lowest ever in the country’s history, while plans to raise taxes are dominating economic discussions.
But spending isn’t the singular challenge. Its stock market has faced a massive exodus from foreign participants, who accounted for about 55 percent of total participation, in 2014. This downgraded Nigeria, one of the two African countries in the top 10 most promising bourses globally in 2013, to the worst performing exchange in Africa last year. Also, upcoming national elections have driven shivers into the spines of investors, as most are predicting spats of violence due to heightened tension between the two front-running parties.
The signs that managing these fleet of challenges on a shrunken budget may eventually prove impossible are already surfacing. In January, Dr Ngozi Okonjo-Iweala, Nigeria’s Finance Minister and the Coordinating Minister for the Economy, said plans to augment capital spending with “external long-term concessional borrowings for infrastructure projects” were already in the offing. Among those being courted to provide the funds are the World Bank and China.
Nigeria may continue to explore its shrinking options so as to avoid dialling the IMF, but should the oil crisis linger longer than expected, and Nigeria’s foreign revenue continues to dwindle, that call may become inevitable.
