Tough Times Ahead for Nigerians

Oil, the chief contributor to the the federal government's revenue, has taken a big hit over the last six months, when it was trading at a peak of $147 a barrel, to the $45 it mustered at the close of trading on Friday. The sharp fall in price has been due to the global economic slowdown.

The reduced revenues from the sale of oil has led to the Nigerian government announcing budget cuts and the Central Bank of Nigeria, stating that it is deliberately crashing the value of the country's currency, the naira, as a means to stabilise the country's economy and of its foreign reserve. If that is the case, the CBN and Nigerians are in, like the Chinese will say, "interesting times" ahead and here is why.

The global economy is slowing down faster than most analysts expected and, despite the best efforts of OPEC to reduce production to stabilise prices, this will likely force oil prices down further.

The demand of for oil products in the US, has meant that it has been able to build up its oil reserves, which has a negative effect on the price of oil as the world's largest consumer (the more oil it has in its reserves, the less it needs to buy which leads to lower oil prices), and if the the economic slowdown is protracted as usually the case in global economic recessions, then the lower demand for oil will allow for the country to keep building its stockpile.

The truth is nobody knows how deep and how long the global recession will be. Obama in his inauguration speech was calling on Americans to brace themselves for tough times ahead. It is unlikely he would have said so if he truly believed that the bailout package being put in front of congress will have any more effect than slowing down the rate of economic collapse.

Then there are the added fact that the United States is now going to push a more aggressive strategy to develop and use alternative forms of renewable energy. This will further decrease in demand for oil.

What this mean for Nigeria? The US is the largest importer of Nigeria Oil, which accounts for 95% of the government foreign exchange receipts and 60% of its total revenue. A reduction in earnings for the government spells bad news for the Nigerian economy as government spending is the chief economic driver.

A reduction in government spending will lead to a slow down in the Nigeria, unless somehow the following happen:

1. An increase in consumer spending: This is unlikely in a country where 90% of population lives on less than $2 a day.

2. Increased investments: A decrease in the value of the naira might have led to an increase in foreign investments, but with the poor infrastructure and tough business climate, Nigeria has struggled with attracting major investments outside its oil and telecoms industries. With the stock market crashing it will be hard to see if any serious investor will want to put their money in the Nigerian market.

3. Increased trade: With oil being the major export of the country and its price falling, unless Nigeria begins to focus building a proper manufacturing base or focuses on increasing the export of non-petroleum based goods, it is likely the country is going to continue see a fall in revenue from its trading with other nations.

Unless the government begins to implement reforms to stimulate growth in non-oil sectors, Nigerians should brace themselves for some interesting times ahead.