Oil, Nigeria, Cycles And Government Policies

Nigeria has experienced both boom and bust in the last ten years. The rise of foreign direct investment and the capital markets in 2006 to 2007 before a sudden crash the capital markets is yet to recover from. Also the increased volatility of the crude oil price has created years of abundance and years of famine for the nation. All the while government have been making different policies to steady the nation on a smooth path of growth. This is an analysis of those policies.

Below is a table of the economic indicators for Nigeria over the past seven years and a forecast for the next two years (2016 and 2017).

Table 1: Economic indicators for Nigeria

Economic Indicator	2009	2010	2011	2012	2013	2014	2015	2016	2017
Economic Activity
Real GDP (YoY%)	9	10	4.9	4.3	5.4	6.3	2.7	3.6	4.5
CPI (YoY%)	12.6	13.8	10.9	12.2	8.5	8.1	9	10.5	9.5
Unemployment (%)	19.7	5.1	6	9	8.1	6.4	10.4
External Balance
Curr. Acct. (% of GDP)	5.1	3.9	3	4.4	3.9	0.2	-2.4	-3	-2
Fiscal Balance
Budget (% of GDP)							-1.8	-2.6	-2.1
Interest Rates
Central Bank Rate (%)	6	6.25	12	12	12	13	11	11.9
3-Month Rate (%)			17.45	13.88	12.13	15.25	11
Exchange Rates
USDNGN	149.5	152	162.3	156.15	160.3	183.45	199.3	240	240

Source: Bloomberg Terminal (2016)

In the last seven years (2009 to 2015), the economy has experienced drastic, rollercoaster-like, changes in every important economic indicator. The GDP growth has gone up and come down. The inflation rate had a range of over 5% from lowest of 8.1% in 2013 to 13.8% in 2010. The unemployment rate has been swinging up and down. The current account balance has fluctuated widely from a surplus of 5.1% of GDP to a deficit of -2.4% of GDP. The central bank interest rate has doubled within the seven-year period and over a range of 6%. And the exchange rate has also fluctuated badly from 149.50 Naira to a US Dollar in 2009 to 199.30 Naira to a US Dollar in 2015. It is currently 316.50 Naira to a US Dollar (21 October 2016), way beyond analysts estimates.

And what policies did the government embark on at the different difficult periods of the economy?

To properly answer that question, it is best to break the last seven years into the distinct economic periods they represent:

·         Period A – 2009 to 2010. This is the period Nigeria got caught in the global financial crisis.

·         Period B – 2011 to 2013. This is a period of relative stability and prosperity as crude oil price soared and political tensions dropped.

·         Period C – 2014 to 2015. This period is marked by a huge drop in crude oil price that hit the economy harder than expected.

Below are graphs of the economic indicators across these three distinct periods.

Figure 1: Real GDP Growth over the past seven years

Source: Author (data from Bloomberg)

Figure 2: Consumer Price Inflation (CPI) rate over the past seven years

Source: Author (data from Bloomberg)

Figure 3: Unemployment rate over the past seven years

Source: Author (data from Bloomberg)

  

Figure 4: Central Bank rate over the past seven years

Source: Author (data from Bloomberg)

Figure 5: Current Account Balance over the past seven years

Source: Author (data from Bloomberg)

 Figure 6: Crude Oil Price over the past seven years

Source: Author (data from Federal Reserve Bank)

Figure 7: Exchange Rate over the past seven years

Source: Author (data from Bloomberg)

Period A: 2009 to 2010

When the global financial crisis started fully across the developed countries in 2008 from the domino effect of the subprime mortgage loan and derivatives crisis in USA in 2007, the government in Nigeria believed Nigeria was immune to the crisis as there were no complex securities or derivatives market in Nigeria that is linked to the USA market. Unfortunately, this reason for inaction underestimated how globally linked the financial world is. Over 70% of investors in the Nigerian stock exchange were institutional investors and a significant portion of the funds they managed were from foreign investors. Soon these foreign investors started pulling out their investments in the Nigerian market mostly to rebalance their portfolios and take advantage of depressed asset values in the developed countries. This opened the pathway for the financial crisis flood to enter Nigeria. The already depressed stock market, correcting itself from the unreasonable high valuations of 2007, was further depressed. The banks came under intense stress as assets value dropped nationwide and their non-performing loans ballooned. Commodity prices dropped, especially crude oil and this led to drop in government revenue and put pressure on government spending.

The government went on an expansionary fiscal policy. The central bank also dropped rates to 6% to stimulate bank lending to businesses and grow economic activities, mitigating the effect of the drop in economic activities. And it worked. Inflation was kept in check and the real GDP even grew.

Period B: 2011 to 2013

This was a period of prosperity for Nigeria. The oil price soared to over 100 US dollars per barrel leading to a big increase in government revenue and government spending. In other to prevent increase in inflation, the central bank raised rates from 6% to 12%. With the increase in foreign exchange income, the exchange rate was stable and the Naira strengthened slightly. Unemployment rate was low. However, the government spent all the windfall from the crude oil sales and the foreign reserve shrank rather than grow during the prosperity period.

Period C: 2014 to 2015

This was a much more trying period for Nigeria than even the 2009 to 2010 period. Crude oil price dropped from above 100 US dollars to below 50 US dollars. The subsequent drop in government revenue and foreign exchange earning was worsened by an inadequate foreign reserve. The economy had grown a lot during the previous years and import has also grown, so when the value of crude oil export dropped, there was an unprecedented pressure on the foreign reserve. Central bank’s immediate response was to reduce the official foreign exchange demand by severely limiting access. The initial result was an unofficial market with dollar rate close to double that of the official rate. The government became confused trying different contrasting policies one after another. In the end it settled for a contractionary monetary policy and an expansionary fiscal policy, and the result has been an economy in limbo.

REFERENCES

Bloomberg Terminal (2016). Country Guide: Nigeria Economy. Lagos: Bloomberg Media

Federal Reserve Bank of St. Louis (2016). Crude Oil Prices: Brent - Europe (DCOILBRENTEU). [online] Available at: https://research.stlouisfed.org/fred2/series/DCOILBRENTEU/downloaddata [Accessed 8 May 2016]

Ovadia, J. (2013). Measurement And Implementation Of Local Content In Nigeria – A Framework For Working With Stakeholders To Increase The Effectiveness Of Local Content Monitoring And Development. Lagos: FOSTER.