Wednesday, June 3, 2015 / PwC Nigeria Economy Watch
Nigeria: in the eye of the storm
The global economy is in the midst of an oil price adjustment. The price of oil fell by 60% in the 7 months to January, driven down by:
• buoyant oil production, including from booming shale oil production;
• weakening energy demand from emerging markets; and
• the strengthening US dollar.
By late-January, Brent Crude traded at around $50, hitting its lowest-levels since the nadir of the global financial crisis in 2009. Swift cuts in production in the costliest Shale fields and sharp reductions in capital expenditures have seen prices recover to around $60-65 by the end of the first quarter of 2015 – but this still represents a major adjustment from the $90-110 average price levels we’ve seen over the last five years.
For net oil importers, the effect has been akin to a tax cut: paring back inflation and lowering costs for consumers and businesses. The effect on net oil exporters like Nigeria has been punishing, seeing export and government revenues decline rapidly, foreign investors fleeing domestic financial markets and imposing significant downward pressure on fixed or managed currencies.
The importance of oil to Nigeria
Oil is Nigeria’s main source of foreign exchange earnings and government financing.
As a result, growth expectations for the economy have deteriorated. The Nigerian Ministry of Finance projects growth this year of 5.5%, down from 6.4% at the start of 2014. We expect that even under a benign economic scenario, the Nigerian economy will struggle to realise growth much higher than 4.0%. Nigeria’s economy has tended to suffer following an oil price crash, although its resilience has improved in more recent times.
Getting the policy response right matters as falling economic growth imposes a real ‘human’ cost on the population. In our World In 2050 analysis, we expect GDP per capita to hit $10,000 in Nigeria in 2030 – just a 1 percentage point slower growth rate per year would see this development threshold delayed by almost a decade, to 20382.
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