OPEC, an organization of some oil producing nations, plans to cut oil output to boost price; crude oil price has fallen by around 20% in 2020. But where they fail to get the prices under control, Nigeria’s national budget would be under stress since the benchmark oil price used in the budget was $57 per barrel. (Current oil price, at $45, is well below $57 per barrel.) This is a double whammy: simultaneous drop in oil price and volume.
In Nigeria’s history, whenever that happens at scale over say 6 months, the naira pays the price. Why? The foreign reserves which the Central Bank of Nigeria (CBN) uses to defend naira’s value, in the global currency market, become depleted, since the lower price and volume mean lesser money is being made by the nation.
Nigeria opened 2020 with $43.1 billion in its foreign reserve. Today, that number has dropped to $38.6 billion. Typically, CBN fights until it hits $30 billion, by them it releases the magic armour – devaluation. Devaluation is a crunch time call: we cannot continue defending the naira to the point where our “bank balance” goes to zero. Yes, a time will come when we will have to leave naira to lose value, necessary to keep balance in that bank account.
Of course while U.S. is cutting rates, my fear is that Nigeria could look at currency devaluation if suddenly global crude oil demand stalls and the nation has local bills to pay; it does have a lot. Oh yes, you can do money doubling: bring in a few dollars and have more Naira to pay your naira-denominated debt obligations. This virus poses severe risks to our economy because it can distort all the business scenarios if exchange rates begin to shift, rapidly.
Nigerians have just 120 days before we read that the central bank is devaluing naira if covid-19 continues . So, if you have a prophet, imam or pastor who can pray for coronavirus to disappear, now is the time to contact them. If not, there would be massive dislocation in coming months. This coronavirus could attack currencies of developing economies in ways that would be ugly.
Update: The CBN has a note, below.
Register for next edition of Tekedia Mini-MBA (June 22 - Oct 22, 2020) here. Four months, online, and costs $140 or N50,000 naira .