E-Financial
What Does Sub-Zero Oil Mean for Nigeria’s Economic Outlook?
By Lukman Otunuga, Senior Research Analyst at FXTM,
April 20, 2020 will go down in the history books as the day when WTI crude futures expiring in May plunged more than 300 percent, falling as low as minus $40.32 per barrel amid COVID-19 pandemic lockdowns.
Utter chaos ensued after the US benchmark prices for crude Oil went sub-zero for the first time ever, driven down by the producer’s desperate attempt to pay buyers to take the commodity off their hands. This was due to fears that storage capacity could run out in May.
As Oil sank, tanker stocks soared, reflecting an intense increase in demand for crude storage space. It says a lot about the unprecedented nature of the coronavirus pandemic when we see that the fastest-growing demand trend in the Oil markets is for storage space.
Prices rose spasmodically after Iran launched its first military satellite, earning President Donald Trump’s ire. But this has not changed the fundamental themes weighing on Oil.
For Nigeria, these fundamental themes of collapsing demand and oversupply are big headwinds even if the country’s Oil is benchmarked against Brent Crude. The Nigerian state depends on Oil for 60 percent of its revenues and 90 percent of its foreign exchange. But with prices for several Oil benchmarks falling below zero, Nigeria is generating massive losses for every barrel it produces, meaning the economic outlook is growing more precarious.
It’s likely that foreign exchange reserves will stay on the firing line while the Naira remains exposed to downside shocks. A further weight on the currency and government revenues is that Nigeria spent four times as much moneysubsidising fuel versus building schools, health centres and science labs in 2019. Another inefficiency which may come back to haunt is the fact that Nigeria produces crude Oil which is sold to the US, China and Europe only to re-import natural gas at higher prices.
With the cost of producing Oil at around $15-$17 per barrel, the current volatility and weakness in Oil prices may fuel fears of a sovereign debt crisis. Nigeria’s total debt stands at around $84 billion with up to 80% of its bilateral debt owed to China. Already, Fitch Ratings has cut Nigeria’s Long-Term Foreign Currency Issuer Default Rating (IDR) to B from B+.
Weakening outlook notwithstanding, Nigeria is making the same choice as most other world governments – to stop the spread of coronavirus. The plan is to raise as much as $6.9 billion from multilateral lenders to help fund efforts to stop the disease in its tracks.
This is the right choice, and could give the economy a better chance to recover more quickly after the pandemic ends.
Meanwhile, the short-term outlook for Oil prices remains grim due to demand destruction and slowing global growth after China experienced an economic contraction in Q1 on top of a lack of storage space.
Given that Oil sector weakness is set to remain a dominant theme in the short-to-near term, Nigeria must act fast and break away from the chains of Oil reliance to other sustainable sources of growth. Diversification is the lifesaving elixir to Nigeria’s ailments but the benefits will not happen overnight.
Digitalisation has become a hot trend in many countries as populations and governments seek to reduce human contact but increase human connection. In the same vein, the government’s ‘Change’ agenda has never been more important than it is now. Technology and innovation may be the focus of increased investment as other economic sectors come to a standstill under lockdowns.
To sum up the new reality, Nigeria has displayed resilience to external and domestic risks in the recent past but the coronavirus pandemic and collapsing Oil prices could present one of the biggest economic tests in its history. Will Nigeria be able to weather the storm, evolve and rise from the ashes like a phoenix or will Africa’s largest economy face the same fate as Venezuela and Zimbabwe?
My sincere hope is that the economy will adapt quickly, resulting in a faster-than-expected comeback.
The World Bank has predicted that Nigeria may likely see a rise in the levels of poverty over the next two years despite a moderate economic growth forecast.
The multilateral lender noted that while non-resource-rich countries are expected to continue reducing poverty and grow faster, resource-rich countries like Nigeria may drag due to declining oil prices.
”Resource-rich countries are expected to see less progress in terms of poverty reduction,” the World Bank said in its Africa Pulse report titled ‘Improving Governance and Delivering for People in Africa’.
“Importantly, poverty in resource-rich, fragile countries (which include large countries like the Democratic Republic of Congo and Nigeria) is expected to increase by 3.6 percentage points over 2022–27,” it added.
The Nigerian government has in the past two years provided various safety nets to ease the burden of the citizens, but these, on their own, may not be enough to lift millions off the poverty line.
The reforms which were implemented some 20 months ago, though came with a plethora of gains such as allowing the economy to be market-driven rather than artificial pegging, it’s nonetheless exacerbated poverty with the numbers rising from 104 million to 129 million people in a year.
According to the World Bank, Nigeria accounts for 19 percent of the share of poverty in Sub-Saharan Africa, followed by Congo, Ethiopia and Sudan with 14 percent, 9 percent and 6 percent respectively.
But despite the growing poverty, the Washington-based lender expects Africa’s most populous nation annual GDP to increase 3.6 percent in 2025 and 3.8 percent in two years. “Economic growth is expected to remain moderate in Nigeria,” the World Bank said.
“It is expected to increase from 3.4 percent in 2024 to 3.6 percent in 2025, and slightly increase to 3.8 percent in 2026–2027.”
According to the World Bank, the gradual recovery of the Nigerian economy along the forecast horizon is driven primarily by the service sector—specifically, finance, information and communications technology services, and transportation—and, to a lesser extent, a rebound in oil production that converges to its OPEC+ quota.
The World Bank’s projection is relatively higher than the International Monetary Fund (IMF) revised forecast for the nation.
IMF cuts Nigeria’s 2025 economic growth forecast downward to 3.0 percent from the earlier projection of 3.4 percent in 2024, citing weakening oil supply and escalating global trade tensions.
The two projections are however largely lower than Nigeria’s ambitious projected annual GDP growth of 4.6 percent outlined in the 2025 budget.
According to Adetilewa Adebajo, investment banker and economist Nigeria must intensify efforts towards economic diversification, infrastructure development, and asset optimisation to stimulate economic growth and attract global investments
“Sale of oil and gas JV assets to optimise equity within the FGN capital structure and balance sheet are crucial for Nigeria’s path towards sustainable development.
“Deliberate Investment projects such as the Agro Airport development and Olokola deep sea port, in Ogun State, major infrastructure projects led by companies like Arise and Dangote, need to be replicated nationwide,” Adebajo said.
Securities and Exchange Commission (SEC) has urged Nigerians to report any suspected illegal investment schemes to the commission for proper investigation and necessary action.
This is in the light of the recent collapse of Crypto Bridge Exchange (CBEX).
The Commission issued a notice on Thursday to the investing public, warning that Ponzi investment schemes pose a significant danger to the growth of the capital market.
In its latest advisory, the Commission highlighted the growing threats and risks posed by Ponzi schemes, illegal investment operations, and unregistered digital asset platforms.
It explained that fraudulent entities and individuals continue to exploit unsuspecting investors with deceptive promises of high returns, often leveraging the allure of digital assets to create a false sense of legitimacy.
“The public is strongly advised to be wary of investment opportunities that promise guaranteed or unusually high returns with little or no risk.
“These include unregistered platforms offering cryptocurrency investments, forex trading, or blockchain-based schemes, without undergoing the prescribed processes to obtain prior approval from the SEC.
“The SEC reiterates in this regard that, ‘If it sounds too good to be true, it likely is.’”
The Commission urged potential investors to conduct thorough due diligence before investing and to verify the registration status of the company or individual offering the investment through the SEC’s website.
The Commission explained that Section 196(3) of the Investments and Securities Act, 2025, criminalizes the promotion and operation of prohibited or unregistered schemes.
“This violation is punishable, upon conviction, by a fine of not less than ₦20 million or a prison term of 10 years, or both,” the Commission warned.
The SEC stated that it is fully committed to identifying and prosecuting offenders to the full extent of the law.
“We encourage the public to partner with the SEC to safeguard the integrity of the investment environment in Nigeria by promptly reporting suspected illegal investment schemes to the SEC,” the notice concluded.
The Nigerian federal government announced that the Electronic Money Transfer Levy (EMTL) generated $49.5 million in revenue, with fintech companies contributing $18 million.
This fund, as reported by the Federation Account Allocation Committee, is a considerable 56.80 percent increase over the $31.6 million earned during the same period in 2024.
Previously, the charge mainly affected established banking institutions. However, fintech firms have been included because they have contributed a phenomenal 2,507.94 percent growth in transaction values since 2020.
The EMTL is part of the government’s attempt to regulate the booming fintech sector, which completed transactions worth $29 billion in 2023 and $49.3 billion in 2024.
The EMTL was created by the Finance Act 2020 as an amendment to the Stamp Duty Act. It charges $0.03 (N50) for electronic transactions of $6.19 (N10,000) or more made through banks and financial institutions.
This tax seeks to capitalise on the increasing expansion of electronic payments, which will exceed $619.70 billion in total transactions by 2024.
In response to the burgeoning fintech sector, the government has increased its tax base, with annual EMTL collections expected to increase by 31.35 percent.
According to the Medium Term Fiscal Framework for 2025-2027, the federal government expects EMTL revenue to reach $142 million in 2025, up from $108 million in 2024.
However, industry experts have expressed concern about the potential impact of additional taxes on users.
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