•Experts predict 18% decline in Q4
The three tiers of government shared N5.92 trillion from January to September through the monthly statutory allocation.
Meanwhile, the Central Bank of Nigeria (CBN) in its bid to defend the naira sold $26.1 billion through the bi-weekly Retail Dutch Auction System (RDAS).
Analysis of the monthly statutory allocation through the Federal Accounts Allocation Committee (FAAC) reveals that the three tiers of government shared N1.91 trillion in the first quarter. This rose by 7.7 percent to N2.07 trillion in the second quarter, but fell by 6.2 percent to N1.94 trillion in the third quarter.
Experts have however predicted an 18 percent decline in statutory allocation to the three tiers of government in the fourth quarter due to the persistent decline in crude oil prices.
Meanwhile, the CBN, in an effort to defend the naira sold $26.1 billion through the bi-weekly Retail Dutch Auction System from January to September. The apex bank sold $9.5 billion in the first quarter, $8.2 billion in the second quarter and $8.4 billion in the third quarter.
The $26.1 billion sold in nine months exceeded the total amount of foreign exchange sold through RDAS in 2013. Last year the apex bank sold $25.37 billion.
The huge foreign exchange sale notwithstanding, the naira depreciated by N1.22 kobo at the interbank market within this period. From N162.58 per dollar in January, the interbank exchange rate rose to N163.8 per dollar by September 30th.
The huge foreign exchange sale however undermined the nation’s foreign reserves, which fell by $3.37 billion from $42.99 billion in January to $39.62 billion at the end of September.
The fall in reserves was in spite of 13.9 percent increase the nation’s earnings from crude oil in the first half of the year. According to the quarterly economic report of the CBN, oil revenue rose to N3.6 trillion from N3.12 trillion in the second half of 2013.
Thus experts predicted that with crude oil prices maintaining a downward trend, with the inevitable effect on oil revenue, revenue into the federation account would fall in the days ahead while the decline in external reserves will persist.
According to Managing Director/Chief Executive, Financial Derivative Company, Mr. Bismarck Rewane, “If oil price declines to $86.4 per barrel (pb) and production is at two million barrel per day (bpd), oil revenues will decline by over 33 percent.
The fiscal deficit will be N2 trillion or 2.21 percent of GDP. Net federation distributable revenue will decline by 33 percent from N4.5 trillion to N3 trillion. Weaker oil earnings will causes further risks for Nigeria
The same prediction was expressed by Razia Khan of Standard Chartered Bank. She said, “Weaker oil earnings raise risks for Nigeria. The oil price has remained below $100 per barrel for much of the past month. Since August, weaker revenue has also pointed to the likelihood of lower oil output.
Nigeria’s medium-term budget plans assume a rise in the benchmark price of oil in 2015 at the same time that sensitivity to oil earnings is likely to be elevated. Any shortfall in oil output from the 2.39 million barrels per day assumed in the 2014 budget raises the level of price sensitivity above the $77.50 benchmark price that is currently assumed.
Nigeria has little buffer against downside risks, with only $4.1 billion in its Excess Crude Account (ECA) in September. The elections will increase pressure to speed up budget implementation, with further downside risks to both the Excess Crude Account and foreign exchange reserves.
In its latest Economic Bulletin issued last week, FDC also warned, “”The fall in oil prices could spell major economic problems for Nigeria.” The Bulletin explained that at current prices of approximately $90pb, government revenue for October will drop by seven percent to $7.03 billion.
The fiscal deficit will rise to $1.39 billion (3.3 percent of GDP) and the External Reserves will deplete to $36.83. At current official exchange rate and RDAS foreign exchange sales, the naira will be mispriced by approximately 2.9 percent in October.
A further decline of oil prices to $80pb (just $2.5 above the Nigerian Federal Governments budget benchmark oil price of $77.5pb for 2014) would cut government revenue to $6.25 billion, push the deficit to 3.7 percent and deplete external reserves further to $33.36 billion.
“At this point, the naira will be mispriced by 3.9 percent if the CBN continues to defend it at the expense of the External Reserves. FAAC disbursements will nosedive and more money will be needed to fund the deficit.
Erosion in reserves will put the currency under immense pressure, and the CBN is likely to further tighten monetary conditions and bring the issue of currency adjustment back to the front burner.
Nigeria‘s import dependency makes any decision on the value of the currency a rather intricate given that general elections are barely four months away and the attendant consequences of any downward adjustment will not just be economic, but political.”
These predictions are already playing out in the foreign exchange market. Last week the naira depreciated by 50 kobo at the interbank market, as the interbank exchange rate rose to N165.2 kobo from N164.7 the previous week.
This however translated to N1.2 depreciation when compared with the closing rate of N163.8 per dollar at the end of September. Similarly, the external reserves had lost $210 million in October as at Thursday last week, falling to $39.41 billion from $39.62 billion.