FG Gets Over 80% of FX Earnings from Oil, Gas Exports
Zainab Ahmed, Finance Minister

FG Gets Over 80% of FX Earnings from Oil, Gas Exports

Nigeria says that over 80% of its foreign exchange earnings are from oil and gas export, Budget Office said in Medium Term Expenditure Framework, adding that the achievement of the target could face risk if global crude oil falls below $50 per barrel.

Global oil prices have maintained an uptrend post lockdowns, though prices retrace after crossing $80 per barrel marks. The increased supply by the Organisation of Petroleum Exporting Countries and allies amidst rising COVID-19 delta variant in Asia, Europe and America have posed to be a downside risk to crude prices.

According to the budget office, depreciation of the local currency, naira, against the United States (U.S) dollar and other major currencies also pose a key risk to the government’s fiscal position amidst fiscal slippage recorded in the first five months in the year.

Nigeria’s revenue projection came weak as government earnings underperformed by about 50%, coincidently, the lawmakers approved about N1 trillion supplementary budget, thus widening the budget deficit for the year.

Fiscal slippage amidst growing capital and revenue spending has raised total public debts. Nigeria also made a $6.2 billion Eurobond call after strong capital raise in the first half of 2021 in the domestic debt market.  

“Over 80% of Nigeria’s foreign exchange earning is derived from Crude oil and gas export”, the budget office hinted in the MTEF.

It added that in effect, the risk of the Naira depreciating against the US Dollar is a resultant risk should there be a protracted oil price shock, due to the fact that oil revenue receipts are in US dollars.

Businesses that rely heavily on forex for imports of production inputs and capital could also be constrained”, it noted.

To address the exchange rate risks, the finance ministry expects the Central Bank to pursue unification around its National Autonomous Foreign Exchange (NAFEX) market rate, which is the window where investors and exporters transact dollars at market-determined rates.

Seen as a subtle devaluation of the local currency, the apex bank had denied the move though the finance minister said to reporters after the Federal Executive Council meeting that FG’s transaction will be conducted at the NAFEX rate.

Later, the CBN adjusted official exchange rate aligned with the NAFEX rate is currently N410.15 to a dollar government-related transactions, wiped off the official rate of N379 previously used on its website.

In addition, the Budget office expects the CBN will endeavour to significantly improve its foreign reserves to be able to enhance its ability to manage exchange rate risks by defending the Naira against depreciation, where possible.

The projection shows that CBN plans a 5.99% growth for the country’s foreign reserve in 2022, 2.79% in 2023, and 2.71% in the year after.

Nigeria forecast that average oil price of $57 a barrel in 2022, $57 in 2023, and $55 in 2024, premised on a historical trend review as well as the averages of a number of forecasting institutions, factors affecting market fundamentals global economic recovery and plans by governments and market sentiments

The report expects price growth to be moderated by the lingering concern of COVID-19, increased energy efficiency, switching due to increased utilization of gas and alternatives for electricity generation are more reflections in the Medium Term.

Overall, the budget office says oil prices have shown great promise with prices reaching $74.35/b in June 2021 for the first time since October 2018.

FG Gets Over 80% of FX Earnings from Oil, Gas Exports

The OPEC Reference Basket (ORB) gained $6.67, a 12.3% increase, to average $61.05/b for March 2021. Oil futures prices increased sharply in February 2021 as the ICE Brent front-month up $6.96, or 12.6%, to average $62.28/b.

It held that capital outflow risks are a result of low domestic interest rates and high foreign holdings of domestic securities.

The oil demand forecast shows recovery compared to 2019 levels as both COVID-19 vaccination rates and global economic activity go up, combined with current petroleum supply limitations by the OPEC+.

The budget office noted that the OPEC Reference Basket (ORB) (including Bonny light) saw an average of 13.1% increase from January to February 2021, saying that the latter part of the year looks promising as the increased demand is expected from air and road public transport across the globe by Q4, 2021.

“The medium-term outlook of crude oil price remains uncertain given the complex interaction of political and economic factors in the global space, the budget office noted.

“In the event of adverse shock that leads to a plunge in the crude oil price below US$50/barrel, the achievement of some of the targets may be at risk”, according to detail from MTEP.

Overall, within the review period (2022 -2024), the stance of monetary policy would be cautious to enable the Bank to consistently anchor expectations and prevent market agents from overly engaging in speculative activities in response to the major existing shocks – COVID-19 and oil price.

Read Also: Fiscal Deficit: FG Raised 67% of External Borrowing Plan – DMO

Consequently, the primary objective of monetary policy would remain striking a balance between supporting the recovery of output growth while maintaining stable price development across inflation, exchange rate, and market interest rate.

FG Gets Over 80% of FX Earnings from Oil, Gas Exports